How to Get an Education Loan to Study Abroad

Tuition fees continue to rise every year, which can be especially difficult for students, particularly with the current exchange rates. However, there are ways to overcome these challenges and pursue your study abroad dreams. Remember, studying abroad is a lifelong investment.

This is where education loans come in. Let’s explore how an education loan can help turn your dream into reality.

Although the process of loan applications may seem complicated, they are not. Education loans typically cover tuition, books, room and board, transportation, health insurance, and living expenses, with the funds directly credited to your university. Keep reading to learn more.

What are Education Loans?

An education loan, also known as a student loan, is a type of financial aid designed to help students pay for their higher education expenses, such as tuition, books, living costs, and other related fees. Education loans can be availed for studying in India or abroad, for undergraduate and postgraduate programmes, and for certain professional certifications or courses. You can use educational loans to fund your expenses fully or partially.

For example, HDFC Bank offers foreign educational loans for over 950 courses in more than 35 countries. This includes covering MS, MD, MBA, MBBS (only India), executive management, and other courses as applicable.

If you’ve decided on your course, it’s a good idea to check with the loan provider about the funding for your course even before applying to the college or university.

Types of Lenders in India

In India, you can get educational loans from:

• Banks - HDFC Bank, ICICI Bank, Axis Bank, etc.
• Non-banking Financial Companies (NBFCs) - Credila, Avanse, International Student Loan Program (ISLP), etc.
• Government sources - Dr. Ambedkar Central Sector Scheme of Interest Subsidy for Educational Loans, Central Scheme of Interest Subsidy for Educational Loans etc.

Types of Education Loans

In India, the following types of education loans are available:

1. Loans based on location: These loans depend on which university you have applied to, that is, the city and the country. These are divided into:

• Domestic education loan: You can avail of this loan if you have applied for studies at an Indian college or university. Typically, these loans help cover tuition, accommodation, and other academic costs, and their interest rates are lower.
• Overseas or foreign education loan: If you have applied for studies abroad, you can consider taking an overseas education loan. These loans cover tuition, accommodation, hostel fees (if any), cost of study supplies, travel, and other miscellaneous expenses. The interest rates of these loans are competitive but are higher than domestic loans.
   

2. Loans based on graduate programmes: These loans are offered based on the course or programme you choose and are categorised as:

• Undergraduate education loans: You can avail of these loans for your undergraduate studies either in India or abroad. These cover tuition and living expenses.
• Postgraduate education loans: You can apply for this loan if you’re opting for a master’s degree or a professional course in India or abroad.
• Career development loans: These loans offer low interest rates and help you fund your courses geared toward increasing your career prospects and employment. However, the disbursement of this loan depends on the type of course or professional training programme and your career development goals.
   

3. Loans based on collateral: Since overseas education is more expensive than domestic education, some banks may ask for collateral or security to disburse the loan. These are again divided into:

• Loans against properties/deposits, etc: You may be asked to provide certain collateral against the loan, such as your property, fixed deposits, securities, debentures, or bonds, if any. For example, ICICI Bank provides overseas education loans of 2 crores with collateral, and up to 1 crore with no security. Loans against collateral are typically more competitive than unsecured loans. You can avail of these types of loans both for undergraduate and postgraduate degrees.  
• Loans based on third-party guarantee: These loans are given if someone else (a third party) agrees to act as guarantor and pay back the loan if you cannot. Usually, your close family member or a friend, in some cases, can act as a guarantor, and they are accountable for outstanding payments.

4. Student parent loans: They are offered to parents who need financial assistance to educate their kids. They are categorised as:

• Parent loans: These loans are given to parents to fund their children’s higher education in case they have insufficient resources.
• College parent loans: This is considered a joint loan between students and parents. Parents must co-sign the application to avail the loan.

Learn more about the different Indian banks offering educational loans for studying abroad.

Advantages and Disadvantages of Education Loans

Pros:

1. Easy availability: Education loans are easy to get, and the disbursement is often quick.
2. Ease of financial burden: Students can complete their course duration without worrying about resources running out.
3. Flexibility: The loan amounts can range from one lakh to one crore depending on your chosen programme. Loan providers offer attractive repayment plans and interest rates.
4. Extensive cost coverage: With different education loans available, students can fund a variety of expenses including tuition fees, living, housing, travel, and other costs they may encounter. In some cases, banks can offer 100% coverage. For example, ICICI Bank’s education loan covers the cost of your laptop as well.
5. Tax benefits: The best part of availing an education loan is getting income tax benefits. You can claim unlimited tax benefits under Section 80 (E) if you pay the full interest.
6. Co-applicant feature: Your parents or siblings can be your co-applicants, which can ease the burden.
7. Build credibility: Availing an education loan can help build your credibility and make it easier for future borrowings.

Cons:

1. Not all courses or all expenses may be covered. For example, health insurance may not be covered as part of the education loan.
2. Banks may set certain limits on expenses covered by loans. For example, the cost of study materials may be capped at a specific amount or percentage.
3. Any loan constitutes a form of debt, and education loans are no exception. These loans can place a substantial financial burden on individuals and may significantly impact their long-term financial well-being.
4. Interest rates accrue, so a borrower may end up paying more, especially if the interest rates are high.
5. Repayment of loans can impact an individual’s savings.
6. Defaulting on loan payments can have serious consequences.

Eligibility Criteria

Before you can take an educational loan, ensure you meet the following requirements. These apply if you’re considering studying either in India or abroad.

• You must show proof of admission to a college/university/institute in India or abroad.
• You must be an Indian national.
• Parents or co-applicants (if a student is under 18) must be Indian citizens. If your loan exceeds INR 5 lakhs or if you are a first-time borrower with no credit history, co-signers or co-applicants may be necessary.
• You must have an excellent academic record.
• You must have assets to provide collateral if required.
• You or your co-applicants must have an Indian bank account with cheque-writing facility.
• You must be enrolled in a course that is technical or career-focused (preferably) - This helps banks disburse loans faster as they are assured of repayment.
• You and your co-applicants, if any, must meet underwriting norms as applicable.

Factors Affecting Eligibility

Education loans differ from bank to bank and from one financial institution to another. Keep these factors in mind when considering your educational loan:

• Interest rates: Interest rates vary according to the financial institution and the loan amount disbursed. Additionally, rates depend on the type of programme, the chosen college or university, and your academic record. Factors such as collateral and credit ratings also affect interest rates.

• Loan amount: Not every course qualifies for a 100% loan, and financial institutions may not cover the entire cost as per their policy. Many banks fund about 80-90% of the education cost and set a margin percentage that borrowers must cover. These margin percentages can range from 15-20%. The requested loan amount must be justifiable and aligned with your selected course.

• Credit score and other factors: One of the primary factors lenders evaluate before disbursing a loan is the borrower’s credit score. This score determines the loan amount along with other variables such as the type of loan selected, assets or collateral pledged, interest rates, and the policies of lenders.

• Exchange rates: The final loan amount you receive may be less than anticipated as it is contingent upon the prevailing exchange rates at the time of disbursement.

• Fixed vs. floating interest rates: Banks may offer either fixed or floating interest rates for your education loan. Fixed interest rates remain constant throughout the loan tenure, so your repayment amount in EMIs will not change; you will know how much needs to be paid each month. Conversely, floating interest rates depend on the RBI’s repo rate and can fluctuate during the loan’s tenure, meaning that the loan EMIs can increase or decrease.

Loan Application Process

Documents Required for Loan Applications

• Filled and signed application form
• Two passport-size photographs
• Photo ID, such as PAN, passport, driving license, Aadhaar card, or Voter ID
• Proof of residence, such as any of the above
• Academic records like mark sheets, degree or school certificates, IELTS/GRE/GMAT scores, scholarships, if any
• University/college admission proof
• Bank statements (previous 8 months) of co-borrowers
• Income proof of co-applicant like salary slips, IT returns, etc
• Collaterals like property title deeds, sale deeds, approved building plan, allotment letters, etc.
• Legal documents like the khata certificate, encumbrance certificate, property tax receipts, etc.
• Margin money payment receipt
• Academic progress for subsequent disbursals, form A2

Steps to Apply

It’s important to apply for an education loan well in advance as the process can be time-consuming. The key steps in applying for an educational loan:

1. Research lenders and select the right lender.
2. Determine the amount you require.
3. Compare lenders and interest rates.
4. Complete the loan application form.
5. Submit the required documents.
6. Once submitted, the bank reviews and approves the loan and issues a loan document.
7. Sign the loan document.
8. Loan funds are disbursed.

Repayment Plans

• Repayment terms/plans: Many banks offer flexible repayment options. The loan term can extend up to 12 years or longer, depending on the amount borrowed, starting after course completion.
• Moratorium/grace period: A moratorium period is granted to students after they complete their course, during which the loan payment is not required. This period varies from bank to bank.
• Interest-only period:  This is a phase during a loan term where the borrower is only required to make payments on the interest accrued, not the principal amount. That is, you can choose to pay only the interest during this period.

Factors to Consider When Choosing a Lender

Some of the important factors when selecting a lender include determining:

• Interest rates - Vary from lender to lender. Check for interest subsidies or discounts if available; some lenders offer these.
• Tax rebates - Check if your education loan qualifies for tax benefits under Section 80E.
• Repayment options/flexibility - Check if the lender offers flexible repayment options. This can help if you cannot secure a job immediately after your studies.
• Other hidden costs or charges - Application fees, processing fees, and other charges may add up, so research these thoroughly.
• Customer service—Good customer service to answer any queries you may have is essential. A good lender should provide timely help and service.

Key Terminologies you should be aware of

• Collateral: Collateral is an asset or property that a borrower offers to a lender as security for a loan. If the borrower defaults on payments, the lender has the right to sell the asset for loan recovery. These assets can include:
  • Real estate (such as a house or land)
  • Fixed deposits
  • Stocks and bonds
  • Gold or jewellery
     
• Co-signer: A co-signer or a co-applicant is a person who agrees to take joint responsibility for repaying a loan along with the principal borrower. If the borrower is unable to make payments or defaults on the loan, the co-signer is legally obligated to repay the debt. Both the student and co-signer are equally responsible for the educational loan.  Most lenders require a co-applicant to disburse student loans (if more than 5 lakhs), but some may offer them without one.
   
• Grace period: A grace period or a moratorium period is a set amount of time after a student graduates, during which they are not required to make loan payments. This period is usually given to students to find employment. The duration of the grace period depends on the type of loan and can range from 6 months to 1 year.

As an Indian student aspiring to study abroad, it is important to plan your finances wisely. Consider educational loans as your main source of funds if required. If you have obtained a scholarship, don’t depend only on it to augment your funds. Study abroad experts like IDP counsellors can also help you find the right bank for an education loan. Best wishes for your study abroad journey!