Studying abroad is a life-changing event. Compared to the cost of education in India, higher studies in the US are an expensive affair. One of the most popular ways for students to fund their education is by taking an education loan. The students who wish to seek higher education abroad usually have to arrange and show proof of funds as a part of their university and visa application.
Taking an education loan for abroad is essential for an Indian student's journey (especially to the USA). It enables you to choose the best university and course for your higher education, keeping in mind the fees and the country you are applying to study in. Planning your journey and finances properly for the duration of your course in the US can help you significantly reduce your debt by the time you graduate.
But first, it is crucial to understand the process for applying for an education loan to fund your education abroad, including how to qualify for a loan, determining your qualifications, and the documents required. There are other facets of taking a student loan, and choosing the right partner for you is crucial. There are plenty of options to choose from Indian banks such as PNB, Bank of Baroda, and SBI offers education loans for studying abroad, as do other institutions such as HDFC Credila, Prodigy, and Avanse that provide debt products specifically for students via loans. We'll also cover their criteria, the position of a guarantor, and other benefits of taking an education loan to study abroad here.
Students looking to study abroad usually avail of loans up to INR ₹40 lakhs. Interest rates vary from bank to bank and also depend on your credit history. For example, SBI offers different education loans, with interest rates increasing 8.85 % per annum. On the other hand, PNB has interest rates starting from 8.80%. Female students can avail of a 0.05% concession in interest from a few banks like the Bank of Baroda.
Education loans' interest rates for studying abroad with HDFC Credila range from 11% to 14.5%, depending on the current Community Bank Leverage Ratio (CBLR), about 12.55% per year. Prodigy Finance offers interest rates from 8.7% to 11%; Avanse charges between 10.5% and 12.65%. While it may seem obvious to go for the lowest interest rates upfront, evaluate other factors such as processing fees, collateral requirements, and loan duration to get the best deal for you.
The interest rates on the student loan offered vary from bank to bank. On the other hand, keep in mind that the rates keep fluctuating concerning the Marginal Cost of Lending Rate (MCLR) of the Bank.
While choosing a loan, keep in mind the interest rates, processing fee, tax benefits, and the EMIs that you would be born.
Types of Education Loans for Abroad Studies
There are two types of student loans for studying abroad:
- Secured and
- Unsecured.
A public sector bank, a private sector bank, or an NBFC may provide loans with varying interest rates based on the amount borrowed and the availability of collateral.
Let's take a quick look at each of them.
Secured Loans: By applying for a secured loan, the borrower must provide security in India in the form of collateral. While these loans have a lower interest rate, the processing period is lengthy. Failure to pay back the loan can result in you losing the collateral you have put up.
Unsecured Loans: You can avail of the education loan for abroad studies without collateral as a borrower by applying for an unsecured loan. These loans have a higher interest rate. However, the processing time is fast, and guaranteed loan repayment periods are generally short.
Collateral for Study Loan
Collateral is an immovable property (house, flat, or land) or any asset, ideally liquid, that a creditor provides to a financier to protect the loan. Examples of liquid assets include FDs, stocks, bonds, gold, etc.
Your ability to get an unsecured loan usually depends on multiple factors, one of which is your creditworthiness. You should have an excellent credit history to prove to lenders that you are a reliable borrower. Other factors in disbursing the loan can be your university, course, and future earning potential.
How does a student loan work?
During studies, education loans assist students in paying academic fees and non-academic and living expenses. The allocation of a student loan is contingent on the repayment of the interest amount over the amount repaid. The monthly payments accrued against the student loan, also known as Study Loan EMIs, allow the borrowers to repay the loan balance amount in installments.
Tax Benefits on student loans for studying abroad
While funding your higher studies, an education loan can also help you and your family save tax. According to the Income Tax Rules, the interest portion paid on your education loan can be claimed as an Income Tax deduction, per Section 80E. There is no ceiling for claiming tax deductions on the interest portion for education loans, so ensure that you or your family claims this benefit while filing taxes.
You can only claim education loan tax savings or tax deductions for eight years.
Tax benefits for an education loan can be taken on courses enrolled by you, your spouse, and your children. This tax deduction scheme also covers education loans taken for studying abroad. However, ensure that the loan taken is from a financial institution approved by the RBI. Apart from the tax deductions on interest paid, parents can claim income tax deductions on tuition fees paid to a school, college, university, or educational institution.
As a parent, you can claim tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act on tuition fees paid for your children – up to 2 children.
Eligibility Criteria for Education Loans for studying abroad
A student loan is only granted to borrowers who can demonstrate a fair likelihood of paying off the bank loan. Banks cite qualifying standards for candidates to confirm this probability. These requirements apply not only to loan approval but also to student loan tax benefits and subsidies.
The first step is to determine if you qualify for an education loan. The following are the standard conditions used by Indian institutions to determine a loan applicant's eligibility:
- State of Residency - The applicant must be an Indian resident
- Their Age - If the borrower is under 18, their parents will have to apply for the loan on their behalf
- Education - The candidate must have a solid academic record
- The University - The applicant must have been accepted into a well-known international university, institution, or college
- Course applied for - Since banks look at the future earning potential before disbursing an education loan for studying abroad, they tend to choose job-oriented courses. Technical or experienced courses with high future earning potential are generally approved faster
Documents required to qualify for a Study Abroad Education Loan
Before applying for an education loan, the borrower must understand the paperwork needed to qualify for a study loan abroad. For applying for an education loan for international studies, you'll need the following documents:
- Filled Application Form
- Photographs of the claimant and the co-applicant (passport size)
- KYC records for candidates' photo identification verification include the Aadhaar Card and PAN Card
- Having a valid passport is mandatory when taking an education loan for overseas education. If you don't have a passport yet, apply for it under the tatkal scheme to expedite
- Verification of the applicant's and co-applicants' proof of residence.
- The applicant's mark sheet and relevant certificates
- GRE, GMAT, TOEFL, IELTS, etc., mark sheet (score report), whichever is applicable
- Admission proof is a letter from the university or college confirming your acceptance
- Bank accounts statements for the previous six months of the co-applicant
- The income proof of the co-applicant
- Deed of Title on real estate
- A building scheme that has been certified
- A builder's or society's letter of approval for a mortgage. The following documents are needed in case of collateral (immovable property), which may be a flat, a house, or non-agricultural land.
Co-Applicant's Documents for Education Loan
While the bank needs the applicant's documents, they will also need a list of documents from the co-applicant because the co-applicant serves as the applicant's guardian. The following is a list of documentation that the co-applicant must submit:
- Proof of Identity via photograph
- Proof of address
- Evidence of salary
- Bank statement of the salary account
- Return on taxes
- Business evidence (if any) like Company Registration & tax documents
How to apply education loan for abroad studies? Is it easier to apply for an education loan online or offline?
There are three significant steps to applying for a student loan, which can be completed either online or in person. While applicants have always preferred offline loan application methods, online features such as quick turnaround and information transparency are gaining popularity among parents and students, especially since Covid-19 has forced migration to digital processes.
What is the method for obtaining a study abroad college loan?
Loan processing takes time. From submitting your loan application to acceptance and disbursement, it is a slightly time-consuming process. Hence, applying for the loan a little earlier is always preferred. For applying for a student loan, follow these steps:
- Determine the education loan amount or the maximum amount you'll need and how much you can organize your own. Usually, the bank or financial institution authorizes a part of the loan amount, and you organize the rest
- Start comparing the student loans available from various banks to go overseas and choose the one that works best
- Please fill out the loan application form and bring it to your bank after you've decided on a bank and the loan amount
- The bank will release a loan document containing various loan aspects as soon as your loan is authorized. This is aligned with the rules set by the government for studies opting for courses such as MBA, MBBS, etc., abroad
- After signing the loan agreement, the bank will disburse the funds in installments or as requested by the university. Some part of the loan may be disbursed to your U.S. bank account once you open one
Interest rates on education loans for abroad studies: How to find the best option
The percentage figure that the borrower will pay for the lent principal amount is "education loan interest rates." India's interest rates are variable and governed by the Indian Banking Association (IBA) and the Reserve Bank of India (RBI).
For education loans, several banks charge a regular percentage above the capped MCLR (Marginal Cost of Funds Dependent Lending Rates). Applicants who want to apply for loans to fund their studies should keep track of the various banks' varying MCLRs.
Calculators for education loans: affordable EMIs, affordable loan amounts, and loan terms
While numerous unauthorized websites offer education loan calculators or EMI calculators, students can only use genuine calculators to evaluate the loan. Many banks, such as SBI, have their study loan calculators, but it's best to use the IBA (Indian Banking Association) loan calculators for structured analysis.
What is the procedure for repaying student loans?
Student loans are similar to most bank loans, where the borrowers must pay periodic EMIs (Easy Monthly Installments) before the whole debt balance and interest. Each monthly payment comprises a part of the principal and a part of the interest. Students will select the number of their EMI for their study loan, depending on their financial situation. The cheaper the EMI, the higher the principal variable will be, and the borrower will repay the loan sooner.
The following are some aspects of the student loan repayment process:
1. Moratorium period: In India, education loans can begin as EMI payments after the borrower has completed their education or found suitable jobs.
- Period: Period of course + 1 year or first job + 6 months
- The loan's interest will continue to accrue over this time.
2. Loans for students EMI (Easy Monthly Installment): A fixed monthly principal amount set by the borrower in exchange for the research loan.
- Loans for students EMI = principal amount change + (annual interest on total disbursed loan amount/12)
- Applicants can pick any EMI number to control the amount of principal changed for each EMI.
3. Part-payment on an education loan: Students with surplus resources may apply a consolidated contribution sum to reduce the cost of interest rates.
- This has little to do with the fixed EMI amount; students will repay more than the EMI amount up to any point (according to the bank conditions).
- Most banks do not provide this program, but applicants can consult with their branch.
- Part payments may shorten the loan term and lower the EMI premiums on future payments.
4. Prepayment of an education loan: Students who have saved up enough money to cover the whole balance owed on a study loan will pay back the loan in full until the end of the term, regardless of the set monthly EMIs.
- There are some transaction fees involved (not compulsory for all banks).
- Banks do not permit prepayment after the moratorium.
- Applicants should check with their bank to see their prepayment limits.
5. Education loan extension: Applicants may opt to stretch the loan term or reduce the EMI depending on their liquidity. This enables students to handle their loans appropriately.
There are two options to extend your loan:
(i) a drop in the EMI value,
(ii) lengthening of loan terms.
- The amount of cumulative EMIs to be charged is increased by adjusting the EMI value.
- The adjustment in EMI value or the rise in study loan principal sum offsets an increase in loan tenure.
6. Education loan refinancing: Depending upon the applicant's previous loan and credit history, the value of a study loan will be increased to meet their needs. Students who want to pursue their education or obtain additional funds may refinance their original study loan by presenting their existing study loan as evidence.
FAQ's
Q. What is the maximum amount of money you can borrow to study abroad?
Most banks offer loans up to INR 20-30 lakhs, and once the loan volume exceeds INR 20 lakhs, the interest rate rises. Non-banking financial institutions (NBFCs) offer loans up to INR 1 Cr, covering educational and living expenses.
Q. What types of courses are eligible for college loans while studying abroad?
Generally, banks and non-bank financial institutions (NBFCs) tend to lend money to undergraduate and postgraduate studies. Most banks provide education loans for job-oriented and vocational courses taken abroad.
Q. How long does a college loan last?
In most cases, the entire term of an education loan is from 5-7 years. In the case of larger debt sizes, though, specific lenders will be able to negotiate a longer term of up to 15 years.
Q. Is it necessary to have a co-applicant for an education loan?
Yes, if you are taking a full-time program, having a co-applicant is mandatory. The co-applicant can be your spouse (if married), a guardian, or a parent.
Q. Can I have co-borrowers?
In the case of a married claimant, your parents/guardians will be a co-borrower and your partner. To boost the applicant's odds of a successful loan application, the co-borrower must have a stable stream of income and a transparent credit background.
Q. Is a credit score relevant while applying for a student loan?
Most borrowers who apply for an education loan have no prior financial background, such as loans or credit cards. As a result, education loan lenders have a specialized credit scoring system that rates education loan applications depending on the University, College, and Entrance Course. They consider the student's academic record and the co-applicants credit score if they don't have one.
Having thorough research and knowledge before settling on the bank and the loan amount is paramount. Make sure you try all the possibilities to find the correct source and seek answers to the questions.
Get your Education Loan!
International colleges provide a great platform to meet students from diverse backgrounds and have learning experiences to propel your career to unprecedented heights. This article covers all the necessary information required by students to make an informed decision about student loans. Students should finalize the right bank depending on their background and after understanding the banking process. Good luck with your studies abroad!
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