Student Education Loan Options and the Right Lender

Now that you have secured admission into the university of your choice, you need to plan your finances to cover your tuition and living costs. While your parents may have saved up for your higher education, taking a student education loan to fund your higher education would be beneficial in several aspects. The primary reason why students prefer taking a loan is to reduce financial dependency on their parents. The reason to opt for loan could also be due to a genuine requirement as the high fees of some universities creates a shortfall despite the savings. Another very popular reason for taking an student education loan is that in case of any unforeseen eventuality in your parent’s financial affairs, the loan amount becomes a backup option, thereby allowing the student to continue studies without a break.

 

Having taken a decision to go in for an student education loan, it then becomes important to consider the various types of lenders in the market and decide on which option works best for you. Students are often plagued by questions like should they opt for a loan even if they have enough money to fund their education? Whom should they take a loan from? What is the Rate of Interest (ROI)? What are the tax benefits accrued by taking a loan? We hope to bring clarity by discussing these aspects on loans, and allow you to decide on which option suits your requirements best.

 

Let us first discuss about why taking a loan is a good option even if you have the required amount for your studies abroad and also when you do not require to take one. If your money is invested in your business and investments that are yielding in excess of the loan rate, i.e., 11.5% or above, then taking a loan may be an economical option for you. Likewise, if your parents’ income is very high (in the 30% tax bracket), then a loan could get you additional tax benefits. On the contrary, if the money is in savings/fixed deposits, then it is better to use that as you will be borrowing at a higher rate and earning a lower rate of interest.

 

Lender options available to students for a student education loan

There are several options available in the market and you can weigh the pros and cons of each option and decide on which one suits your requirements the best.

 

Lender Option Pros Cons
Government /Nationalised/Private Banks
  1. Lower rate of interest as they have access to funds through their CASA (Current Accounts and Savings Accounts) and fixed deposits.
  1. Security or collateral will be required if you need a loan greater than 10 lakhs (which usually is the case for education abroad)
  2. More processing time. For USA, they do not provide a sanction letter before you get the i-20 (and the university demands a sanctioned letter to provide an i-20, which is a catch 22 situation)
  3. There is a limit on the amount they can lend you.
  4. They only cover tuition fees and not living expenses.
  5. You need to visit the bank to complete documentation/formalities.
Non-banking Financial Companies (NBFCs)

Major players – Avanse, Credila, Incred, Auxilio

  1. Student Education loan is their primary business, unlike banks where it may be just one component of the business. Hence, they are more focussed and can provide a lot of extra features /benefits by providing customised solutions. 
  2. Low processing time – from 1 to 4 days if documentation is in place.
  3. Along with tuition fees, they also cover living expenses.
  4. They provide UNSECURED LOANS upto 40 lakhs or even more in some cases (again depending on various parameters). No need to mortgage your property or other assets.
  5. Service at your doorstep – They visit you at home to complete documentation.
  6. Flexibility in customising repayment during the moratorium period – you decide when you want to start paying the EMIs –  immediately/after  graduation/6 months after graduation etc. Till then, you just pay simple interest or partial interest during the moratorium period (some banks also provide this facility)

 

  1. Higher rate of interest
  2. Not all have the 80E certificate that provides tax benefits. (not a huge concern, more on this below)
Non-Indian Lenders

Major players – Prodigy Finance, Mpower etc.

  1. Online processing of documentation.
  2. No collateral required
  3. Low rate of interest (a myth)
  1. No full funding, you may have to pay 15% of the fees and even your living expenses.
  2. Since the company is not based in India, you do not get tax benefits (not a major concern)
  3. The actual amount you repay will be high if INR depreciates (will explain below with example)
  4. Only limited universities are covered 

 

 

Now that you are clear about the pros and cons of each type of lender, we need to focus on the financial advantage/ disadvantage of choosing a particular lender. The difference in the ROI is a primary concern. Secondly, there is also a dilemma of whether to take a loan from an Indian lender or a non-Indian lender, especially since the latter levies an interest of 8% as against the 11.5% from a NBFC. We can lend clarity to the arguments with the below examples:

 

[A] Bank A lends me 40 Lakhs at 9% ROI with collateral and an NBFC provides 40L at 11.5% ROI without collateral. Is the savings enough to justify mortgaging an asset that may be of a greater value?

 

Let us assume you get a disbursal of Rs.10 lakhs in the 1st semester (in August) and Rs.10 lakhs in 2nd semester (in January).

The outstanding amount now is Rs.10 lakhs for 5 months (August to December) and Rs.20 lakhs for 7 months (January to July). The interest is calculated on the average of this amount, which is Rs.16 lakhs (rounded off) for the entire year. 

The difference in the interest rates of the two lenders (11.5% – 9%) is 2.5% annually. 

2.5% on Rs.16 lakhs = Rs.40,000 a year less the tax benefit on the excess interest paid (40,000 * 30% = 12,000) resulting in a net cost of 28,000 or Rs. 2,333 per month.

 

So in a nutshell, by choosing an NBFC like Avanse or Credila, you would pay Rs.28,000 or Rs. 2,333 per month more for the first year and in the bargain, you would not have to mortgage your house/assets.

You can do calculations similarly for the next year, so on and so forth.  Generally, students do not take the last tranche as they secure a scholarship in terms of Research Assistantship/Teaching Assistantship/Graduate Assistantship etc. or an internship. They also save through on-campus jobs etc. Hence the advantage of taking a loan from an NBFC far outweighs that of securing a loan from a bank. 

 

The main deciding factor is whether you would be willing to give your property papers (the value of which maybe in crores) just to save Rs.28,000 a year. Even if you consider the long term impact, over a period of 6-8 years, the max difference would be about Rs.2 lakhs (on the conservative side and approximation based on various scenarios).

 

[B] A foreign lender is giving me a loan at 8% but in USD terms. Will it actually be cheaper?

 

Let us say you borrowed money from a foreign lender at 8% interest versus an Indian Company at 11.5% (both without collateral). 

Loan amount = Rs.40 Lakhs 

Let us assume in Aug 2018 the rate of USD / INR = 65 

The lender disburses a loan amount of Rs. 20 lakhs, which will be equivalent to $30,769.

You graduate in May 2020 and start earning and decide to repay the loans.

Let us ignore the interest amount and focus only on the principal loan amount of Rs. 20 lakhs that you need to repay.


Also, empirically, the rupee usually depreciates against the dollar over the long term and it definitely will in the near future considering the CAD India has now (more for economists to ponder upon).

 

Let us assume USD / INR = 70 in Aug 2020 when the students starts repaying (after 2 years of the disbursal)


Case a – Indian student education loan provider

You need to repay 20 lakhs 

in USD, you need to repay 20,00,000 / 70 = $ 28,571

 

Case b – For Foreign Lender

You need to repay $30,769

If you compare the 2 cases above, you are paying 7.6% more (the amount by which INR depreciated compared to the USD), and this is just on the principal amount of first disbursement. We have not considered the subsequent disbursements or interest tax benefits.

 

You may rightly argue that what if INR appreciates against the USD$, well, the chances for that happening are pretty slim considering the economic scenarios and if you wish to bet on it, then you can definitely go ahead with the foreign loan provider.

 

Some Caveats while taking an unsecured loan

If you are taking an unsecured loan, life insurance is usually mandatory and this actually makes sense. Since the whole idea is not to be dependent on anyone, in the case of any unfortunate eventuality, the insurance repays the loan without any burden on the parents. The lender also needs to mitigate the risk involved as there is no collateral to recover dues if any.

 

The 80E tax benefit on Interest

A sponsor can claim tax exemptions on the interest amount he has paid on the student education loan. These savings become substantial only if the parent is in the 20% or 30% tax bracket and has an annual income of more than Rs.8-10 Lakhs. Secondly, if students repay the loan, then the tax benefit is not available to the parents. To overcome this lacuna, students should transfer the money to parents as a gift, and let the parents use that money to pay off the loan. This would help them avail tax benefits. However, it is seen that most students repay the loan within 2-3 years, and therefore the savings accrued from 80E tax benefit are not substantial.

 

Taking a loan and its impact on getting your visa

Taking a student loan does not affect your chances of getting your visa. You need to explain about your funding to the visa officer and your repayment plan. Taking a loan or not by itself has never been a deciding factor for securing your visa.

 

Note:

The above facts are based on the prevalent rules, regulations and rates at the time of writing the article.  Moreover, every lender may have its own policies and features, and may also deviate from the generic assumptions made in the article for the sake of clarity. It is advisable that you check on the rules, rate of interest, foreign exchange rates etc., and take a call regarding the best student education loan option tailor-made to suit your requirements.