International education loan: What students should not overlook while applying?

2022 was a year of many ups and downs for students who were looking for an overseas education. The huge resurgence of interest in overseas study post the opening of borders consequently led to unprecedented demand for student visas, an increase in university applications, and a need for credit to fund education. A prime example of this was, perhaps, the UK, which witnessed a remarkable growth in student intake to the point where the government officially recognized a near-trebling in the number of student dependents securing visas to come to the UK, from 44,000 to more than 116,000 in just a year. 

With the increase in the number of students flocking to international borders for their next study destination, the requirement for student loans has also increased. Under such circumstances, it is important for parents and students to understand some key facts that can help the process of loan application easier and ensure that they secure their required funds. The better-informed one is, the greater are the chances of landing the best possible means of financing in the shortest amount of time. Here are a few points that can help one plan better for their education loans:

Learn about the types of educational loans

There are only two forms of international education loans to consider: secured and unsecured loans. The difference between these two comes down to collateral security. Collateral security, as the name suggests, is an asset that is put up by the borrower in order to secure their loan. Secured loans are often preferred by banks for obvious reasons and have marginally lower interest rates. Furthermore, it can be difficult for students to acquire unsecured loans as these are granted on the basis of the student’s academic record, their course of choice, the country they are applying to, etc.  Due to the higher risks involved, unsecured loans are offered primarily by private banks like ICICI, Axis, Kotak, etc. and Non-Banking Financial Services (NBFCs).

Understanding the tricks to a successful loan application

The international study loan application process can be long drawn and complicated with both administrative and qualitative factors to keep in mind. The first and most basic step is to ensure that the applicant is positioned to be a viable candidate with a promising future. This means no breaks in academic records, no criminal records, and ideally, a recorded history of both academic and extra-curricular success. This is important from the lending body’s point of view because their investment is in the student’s ability to be a successful professional in the near future. 

The next important factor to understand is the technicalities involved in such a study loan. For instance, many borrowers are caught unawares at the mention of ‘loan margins’. This is a concept unique to secured loans, whereby the lender accepts a certain percentage of the total educational expense, leaving a smaller percentage for the borrower to cover. In general, government banks cover 90% of the total expenses to study abroad. The student is expected to contribute the remaining 10% of the amount, which can be declared via fixed deposits, scholarships, etc. 

The final aspect to account for is the type of collateral accepted by the lender. The laws governing what NBFCs, private banks, and public banks accept as collaterals can differ widely and must be understood before applying for any loans. In general, government banks accept three different types of assets as collateral security for secured education loans: immovable property, liquid assets (which are easy to exchange for capital like cash), and third-party assets (belonging to any obligor other than the borrower. E.g. parents). 

Process of loan disbursement

Perhaps the most anticipated part of any loan process is the disbursement: the release of funds from the lending body over to the borrower and, in this case, the university. Loan disbursement is where the differences between banks and NBFCs truly shine through. As government banks must adhere to the processes and checks laid out by the RBI, loan disbursement becomes a bureaucratic process with multiple forms, documents, and authorizations involved. For instance, public banks require a formality called the education loan disbursement letter which states the method of payment of the tuition fees preferred by their respective universities (as many universities prefer getting their payments via third parties).

The steps for NBFCs are significantly easier and often involve a direct transfer of funds from the lender to the borrower or their university. Naturally, if the university requires it, NBFCs also adhere to the third-party payment system and disburse the funds accordingly. While the precise expenses that a student loan covers can vary, it is important to remember that any international study loan from either banks or NBFCs will go towards tuition fees and accommodation - The two primary financial liabilities of overseas education. 

How and when to repay loans

The most strenuous part of any loan is the repayment. Student debt can be truly a life-altering expense and should not be taken lightly. For instance, the current US student debt stands at $1.6 Trillion, which is greater than the GDP of most countries on Earth. Domestically, the looming global recession as well as the fluctuating currency valuations are expected to increase the interest rates on student loans. That being said, an overview of the international student loan repayment process consists of relatively simple concepts. The most important being the moratorium period. 

The moratorium is a gap offered exclusively for educational loans during which full repayment of the loan is not expected. The moratorium is considered necessary as students are often in no position to repay loans right in the middle of their education. To this end, the moratorium period generally consists of the course duration, plus six to twelve months after the course (depending on the lending bank’s policies). 

Public banks and private bodies handle the moratorium differently. Public banks usually offer payment-free moratoriums where no payment is expected from the student. Private entities, however, usually expect the repayment process to begin in some form as soon as the disbursement is complete. Hence, NBFCs may require students to begin making interest payments on their loans throughout the moratorium period, though the EMI payment strictly begins after the moratorium ends. In general, international study loans can be repaid over a period of 12-15 years after graduation. 

On the borrower’s side, there are a number of ways to insulate oneself against the high-interest rates expected in the future. For instance, availing of the loan in the currency of the destination can negate the effects of currency shifts and invest in assets in the destination country can help gather accessible capital while overseas. Furthermore, making use of the work opportunities granted by the nation can help in both short-term financial growth and long-term employment prospects. 

While considering all of these processes at the same time may seem overwhelming, it is important to remember that you are not alone. There are various international study financing platforms that specialize in providing guidance and economic advice to students traveling overseas for their higher education.

Author: Sayantan Biswas, Co-Founder, UniCreds