The number of Indian students pursuing higher education abroad doubled between 2019-20 and 2023-24, according to a recent report by CRISIL Ratings.
The same report added that education loans for overseas study are a rapidly expanding segment for non-banking financial companies (NBFCs), whose AUM for education loans grew by over 80 per cent and 70 per cent in fiscal year 2023 (FY23) and FY24 respectively. Total AUM for education loans of NBFCs stood at around Rs 43,000 crore as on March 31, 2024 and is expected to grow by 40-45 per cent in the current fiscal year.
Many universities in popular study destinations for Indian students, such as the US, UK, Europe, Canada and Australia, have increased tuition fees. “With tuition fees for international students on the rise, education loans have become critical to bridge the gap between savings, scholarships and the overall cost,” says Vibha Kagzi, Founder and CEO, ReachIvy.com.
Indian students generally turn to banks, NBFCs and some international lenders to avail loans for studying abroad.
Key criteria for decision making
Loan amount: The loan amount should cover tuition fees, books, living expenses and other costs. At the same time, excessive borrowing should be avoided. Loan amounts offered by lenders range from Rs 4 lakh to over Rs 1.5 crore.
“Calculating the right loan amount is essential – shortfalls can cause financial stress, while excessive borrowing leads to unnecessary debt,” says Nilanjan Chattoraj, Head of Credit & Products, Education Loans, InCred Finance.
Interest rates: There are fixed and variable rate loans. Various factors determine the loan rate: the rate at which the bank lends to the NBFC, the student’s risk profile, the ranking of the university, and whether the loan is secured or unsecured. Rates typically range from 8% to 15%, and sometimes even higher.
“Weigh the pros and cons of fixed and variable rate loans before making your decision,” says Sonal Kapoor, Global Business Head, Prodigy Finance.
Loan tenure and moratorium period: Education loans have a maximum tenure of 15 years, including the moratorium period. “Once the student completes the course, he or she has six months to find a job before repayment begins,” says Kapoor.
Kagzi suggests looking into flexible or income-based repayment options to ease financial pressure after graduation.
Collateral and cosigner: For larger loans, either a cosigner or collateral is required. Some lenders require both. Cash, real estate, fixed deposits, mutual fund investments, and insurance policies can serve as collateral.
“Unlike banks, which often require collateral, many NBFCs assess loan applications based on the student’s potential, the course chosen and the place of study. This flexibility allows a wider range of students to access loans,” says Chattoraj.
Kagzi warns that the co-signer must understand his or her liability in the event of non-compliance.
Mistakes to avoid
Borrowers repaying loans in rupees must take into account exchange rate volatility, which can increase the burden of borrowing.
“Make sure the lender offers favorable exchange rates and low fees for currency conversion at the payment stage,” says Kagzi.
Read your loan agreement carefully. Also, pay attention to prepayment penalties, late payment fees, processing fees, and other additional charges.
Before you sign up for the loan, research the job market and the potential salary you can earn in the destination country. Make sure it is enough to cover your EMI obligations.
First published: September 9, 2024 | 18:36 IS
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