Things to remember when applying for foreign currency education loan

In light of the increasing desire among students to pursue higher education abroad, it's essential to consider several factors when applying for an education loan for overseas studies.

The past two years of enforced confinement at home have amplified students' aspirations to pursue higher education opportunities abroad. In just one year, from 2021 to 2022, there was an astonishing 69 per cent surge in the number of students opting for international education. This surge wasn't solely attributed to the pandemic; even compared to the pre-pandemic year of 2019, 2022 witnessed a 28 percent increase in the number of students studying abroad.

Several factors have contributed to this trend, including the growing affordability of foreign education, the limited availability of quality institutes domestically, and the desire to migrate to countries with higher living standards. However, when considering financing options for overseas education, one must weigh the advantages and disadvantages of borrowing from foreign loan providers compared to Indian ones.

For instance, applying for a student loan in your home country enables you to seek a student loan through an institution where you can demonstrate your credit history, or where you have an existing account. You may also be able to borrow and make repayments in your local currency and, should you wish to, offer an asset for collateral or ask a parent, guardian, or family member to co-sign with you. However, for some individuals, obtaining financing in a foreign currency can be advantageous, as it may not require collateral or a co-signer, and loans disbursed directly to foreign educational institutions can help circumvent high international exchange fees. "Seeking a student loan that offers financing in foreign currency can have comparative benefits; some lenders, such as Prodigy Finance, do not require any collateral or a co-signer in order for you to submit your application. Similarly, borrowing in foreign currency - and particularly where your loan is disbursed directly to your school - can help you save on costly international currency exchange fees. Borrowing from a FinTech that disburses loans in foreign currency (such as in US Dollars) can also enable you to build up a local credit history in your country of study," said Mayank Sharma, Head of Global Partnerships and Country Head India at Prodigy Finance.

Additionally, loans backed by universities typically offer longer tenures, ranging from 20 to 30 years, while loans obtained directly from banks typically have shorter durations, usually around 15 years. In contrast, most Indian banks offer repayment periods of approximately 7 -10 years. Moreover, in the US, there may be no limit to the loan amount, whereas in India, the loan amount is typically capped.

However, there are other considerations to be aware of. “There are only a limited set of lenders, and a limited set of courses eligible for foreign currency loans from fintechs. Moreover, international lenders typically show the headline interest rates that are charged to the customer. However, these rates are in a different currency and cannot be compared directly to the loans from the origin country (INR loans in the case of India). Once adjusted for the interest rate differentials, the rates are typically much higher than those offered by the domestic lenders,” said Ankit Mehra, CEO of education financing marketplace GyanDhan

For instance, you're presented with two choices: borrowing $50,000 at a 10 percent interest rate or borrowing Rs 41 lakh (exchange rate assumed Rs 82) at a 12 percent interest rate. Initially, the first option might appear more appealing. However, it's crucial to consider the broader perspective. In the long term, the Indian rupee tends to depreciate. Currently, the exchange rate stands at approximately 82 rupees to the dollar, but assuming typical 4 percent annual depreciation of the currency, students who opt for the dollar-denominated loan will end up repaying an additional Rs 4 lakh over the life of the loan compared to those who choose the Indian rupee option.

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While foreign currency loans might look appealing headline interest rates, when adjusted these rates may become significantly higher than those offered by domestic lenders. It's crucial to compare rates and fees from different lenders to identify the most favourable terms. Utilising metrics like APR (annual percentage rate) can help make these comparisons easier, even though it's not widely advertised in the Indian context. APR is a comprehensive measure that encompasses both the interest rate and any associated fees or additional expenses, revealing the total cost of borrowing.

If you're considering applying for an education loan abroad, here is a step-by-step procedure to follow:

Check Eligibility: Ensure that the course you plan to study is supported by the lender for your country of origin.

Apply Online: Start the application process by providing your personal information through the lender's online portal.

Review Loan Offer: After completing the application, review the loan offer and accept it if it meets your requirements.

Verification: Upload the required documents to support your application. Verification is necessary to match you with potential investors.

Secure Visa: Obtain a loan confirmation/sanction letter to secure your international study visa. Some lenders provide this service at no additional cost.

Begin Studies: Once your loan agreement is finalized, expect the disbursement of your loan, typically sent directly to your educational institution on the agreed-upon date.

Funding for Subsequent Periods: If necessary, secure funding for subsequent study periods through a new application closer to your class start date.

Commence Repayment: For many students, loan repayment begins after completing their studies. However, a few allows full-time students to start repayment six months after classes conclude, with the flexibility to make payments at any time through their website or app. Check details before applying.

Taking these steps will help you streamline the process of obtaining an education loan in foreign currency for studying abroad.