Loan Basics. Borrowing for a foreign degree

Joining your dream university abroad this fall? Doing a course requires a lot of money. Even if you get a scholarship for tuition fees, other expenses for living, books and insurance can add up to a sizeable sum as you will be paying in foreign currency. Education loans from banks and NBFCs are available to fund higher education outside India.

Loan terms Foreign education loans have terms similar to those prevailing in the country. In both these loans, the student and the parent or guardian would be treated as co-applicants. There isno margin requirement for loans below ₹4 lakh.

The loan tenure, which includes the course period, ranges from 10 to 15 years, based on the amount. For example, loan up to ₹7.5 lakh taken under the Baroda Scholar program is repayable in 10 years; the tenure increases to 15 years if the loan amount is higher. Education loans have a moratorium period after which repayment starts. This holiday period is usually the course duration plus one year or six months after getting a job, whichever is earlier.

However, from one lender to another, there are differences relating to the amount and margin requirements for local study vs study abroad.

For example, Axis Bank limits the quantum of loan to ₹10 lakh for studies in India but this limit is pushed to ₹20 lakh for education abroad. The margin requirement for foreign study loans is higher — 15 per cent for loans above ₹4 lakh, compared with 5 per cent for loans to study in India.

Getting favourable terms Banks and NBFCs evaluate three factors, outside of the credit profile, repayment capabilities of the co-borrower and the quality of collateral.

One, lenders look at the student’s academic background. Priyatham Rajagopalan, Chief Operating Officer of Hotcoursesabroad.com , a service provider for Indian students who wish to study abroad, says that consistent academic performance will convince the lender that the student will complete the programme successfully.

Two, they evaluate the course of study for which the loan is taken. Courses that have good prospects of getting a job are given preference. Bank of India, for instance, offers a 0.5 per cent interest concession for loans taken to pursue professional courses, such as engineering, medical and management.

Three, the reputation of the college is assigned a weight. NBFCs, such as Avanse, have ranked colleges in various countries for different courses. If you plan to pursue education in a highly ranked course and college that has good placement and pay-scale credentials, you may be more likely to get quick approvals and better loan terms such as lower interest rate, reduced collateral and processing fees, says Neeraj Saxena, CEO, Avanse Education Loans.

In general, it is easier to get approval and better terms when you approach the bank where you have an existing relationship, advises Rajagopalan.

When you are shopping for a loan, note that lenders have different base rates for their loans, which can affect the interest rate charged on your loan. Some public sector banks, such as Bank of India, offer 0.5 to 1 per cent interest concession for girl students.

Planning your finances There are a few issues to consider when applying for an education loan. One is the foreign exchange risks . The loan you take will be disbursed in rupees and must be repaid in the same currency, but fees and other expenses would be in foreign currency. As a result, you may need more funds than originally planned if the currency swings unfavourably.

Other banks such as Axis Bank require you to assign an LIC policy, with a sum assured of at least 100 per cent of the loan amount, in favour of the bank.

The annual premium for this policy will also be included in the loan requirement, to keep the policy alive. This increases the amount of loan you have to take. You may also have to budget for loan processing fee, which can be steep. For instance, data from loan comparison site Apnapaisa.com shows that IDBI Bank charges a processing fee of 1 per cent of loan amount, while Allahabad Bank charges a flat ₹500. Many banks waive off the processing fee if the loan is approved.

Additionally, if the loan is not serviced during the moratorium period, the interest payments get added to the outstanding loan balance. Some lenders give you the choice of starting the repayment earlier, to reduce the overall interest burden.

For instance, Bank of India offers 1 per cent concession in the loan rate if simple interest is paid during the repayment holiday period. Others, such as Avanse, offer flexible repayment options — simple interest, partial interest payment or EMI payment — during the moratorium period.

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