Foreign Education Loan for Abroad Studies: A Complete Guide for Students

Education loans have become a popular option for financing higher studies - in India or abroad for students who are unable to arrange funds for their higher education. Apart from this obvious benefit, they also have some other benefits.  Let us take a look at some of these benefits that they offer:

• Keep your savings safe for other contingencies - Well, Indian parents spend a substantial amount of their income on their children’s education. However, even if you or your parents are in a position to fund your higher education abroad, it is prudent to take an education loan and keep your personal savings safe for emergencies. No one can predict when an emergency arises and having adequate funds for such emergencies has become a prerequisite these days. Taking an education loan will help you with this. 
• Get tax benefits - Students get tax benefits when they file their income tax returns after they have started repayment of their education. An education loan is eligible for deductions under Section 80E of the Income Tax Act of India. 
• Repayment after the program - The ability to repay your education loan after the program is a major relief for many students who can concentrate on their studies with a single-minded dedication without worrying about repayments and finances. 
• Customized loans - The ability to choose from customized loan products is another benefit of an education loan. An education loan covers all study-related expenses and lenders also have different types of loan schemes for different needs. So, a student can get a customized education loan based on his requirements. 
• Helps build a good CIBIL score - Timely repayment of your education loan is the first step towards building a good CIBIL score - a step that will prove extremely helpful during future borrowings. 

Indian students can take an education loan from a Nationalized bank such as SBI, Bank of Baroda, etc, or a private bank such as ICICI Bank, Axis Bank, etc. They can also approach NBFCs and other international lenders for an education loan. 

Different lenders have different upper limits for an education loan. Nationalized banks have set an upper limit of INR 1.5 crore for education loans. Based on individual cases, NBFCs and private banks even sanction education loans higher than this amount. The limit varies as per the student’s profile, target course, college, country, collateral value (if provided), and co-applicant’s salary.

Students in India can take 2 kinds of education loans. Let us take a look at the salient features of both these education loans. 

• Secured education loan or loan with collateral - This kind of loan is one where the borrower is required to attach collateral when applying for the loan. This kind of education loan is easier to get approved if all the documents related to the collateral are complete and up-to-date. Even though it takes more time to get sanctioned, as the bank has to verify all the documents related to the collateral being offered, it has a lower rate of interest and a longer repayment period. Another benefit of this loan is that it does not need parental income and even has zero repayments during the study duration. Most lenders need collateral for sanctioning a loan amount above INR 7.5 lakhs. 
• Unsecured education loan or education loan without collateral - Students who do not have any collateral to offer when applying for an education loan should not lose heart as they can still make their study abroad dream come true by applying for an education loan without collateral. This loan has a higher rate of interest and is more difficult to get. It also has some form of repayment during the study period and an earning co-applicant is needed to apply for this loan. However, this loan is the best option for such students who need an education loan of more than INR 7.5 lakhs but have no collateral to pledge or are uncomfortable pledging their family assets or savings for their higher education.
   

Students can apply directly to nationalized banks or private banks for an education loan with collateral. Utmost care should be taken that documents related to the collateral being attached are complete and are updated. Students must also submit the complete list of collateral documents when applying for a secured education loan, failing which their education loan application might get rejected. GyanDhan can help them at this step by providing a customized list of documents that would be needed for their loan application. 

Collateral is a security that a borrower pledges when applying for an education loan. It can be an immovable property such as a home or land or intangible assets such as FDs, ULIPs, Mutual Funds, gold, Life Insurance Policies, shares, government securities, etc. This collateral can be used by the bank to recover the loan amount in case the loan becomes an NPA (non-performing asset).

If a student wishes to take an education loan with collateral, then the value of the collateral being pledged should always be equal to or greater than the loan amount being applied for. This will ensure that the loan application does not get rejected. Another important thing to remember when pledging collateral is to ensure that all documents are complete. 

Students who wish to take an unsecured loan of an amount less than INR 7.5 lakhs can apply at government banks. For an unsecured education loan of more than INR 7.5 lakhs, they can approach private banks such as ICICI Bank or Axis Bank or NBFCs such as HDFC Credila, Auxilo, InCred Finance, and Avanse. However, students should look at the fine print of their policies and then choose the best option. GyanDhan can come to their help in this case too by assessing their profile and then suggesting to them the best option for their case and that too for free. 

The co-applicant’s annual income influences the approval of an unsecured loan. Lenders mostly look for co-applicants who earn a minimum of INR 30000. However, unsecured loans are also given to meritorious students who have co-applicants earning less than this, but this differs from case to case and is solely based on the lender’s policies. 

The rate of interest is the cost of borrowing from a lender. Anyone who takes a loan from a bank has to pay some monthly amount that is over and above the principal amount that they have borrowed. This is called the rate of interest. The borrower repays the principal amount along with the interest in equated monthly installments (EMI). 

Public banks calculate your education loan EMI on a Simple interest basis while the education loan rate of interest for private banks and NBFCs is calculated on a compound interest basis. The RoI of an education loan has a huge bearing on a student’s total loan repayment amount and thus should be carefully studied before accepting an education loan offer. To learn more about the rate of interest on education loans, read here. 

Yes, it is possible to reduce your rate of interest, both when you apply for an education loan and also after your loan has been sanctioned. Steps such as applying for a secured loan, applying for loan subsidy schemes, paying interest during the moratorium period, trying to repay the loan sooner than the loan tenure, are some ways in which your rate of interest on an education loan can reduce. 

Nationalized banks offer the lowest rate of interest on an education loan. Among the different public banks, Union Bank of India currently offers the lowest RoI, i.e. 6.80%, on education loans up to INR 20 lakhs. This is followed by Bank Of India and Central Bank of India that have an RoI of 6.85%. SBI and Punjab National Bank give education loans at an interest of 6.90%. Private banks have a higher rate of interest than government banks. Among them, HDFC Bank offers the lowest rate of interest of 9.25% on education loans. This is followed by Axis Bank of India that gives education loans above INR 7.5 lakhs at an RoI of 13.70%. 

Depending on the lender and kind of education loan you have applied for, the loan process and sanction time will differ. This loan sanction time can further increase if your documents are incomplete. Students who wish to expedite their loan process and sanction time can take the help of GyanDhan that helps students get their unsecured education loan sanctioned in 4 days and a secured education loan sanctioned within 10 days. 

The list of documents required for an abroad education loan is quite varied. Depending on the lender and the scheme, the documents required would vary too. However, some common documents that are essential when applying for an education loan are as follows:

• A copy of the applicant’s passport, PAN card, Aadhar card
• Residence proof
• Marksheets of 10th, 12th, and the last qualifying exam 
• A copy of the admission letter from the target college
• Fee structure and other study-related expenses during the program
• Bank account statement of the last six months
• If any financial aid, such as scholarship has been received, a letter stating the same

Many times students miss submitting some document and this results in rejection of their loan application. To prevent such a mishap, students can approach GyanDhan and get a customized list of documents that would be needed along with their loan application. 

Margin money in education loans is the amount that the borrower has to pay for his education while the rest is paid by his lender (public or private banks). It is calculated by the following formula:
{1-(sanctioned loan amount/overall expenses)*100}
Any scholarship of financial aid that the borrower receives during the program will be included in the margin money. Different lenders have different margin money for education loans. NBFCs on the other hand have no margin money. Let us take a look at the margin money set by different lenders.

The processing fee is the amount charged by the bank to process your loan application. This varies from bank to bank and from scheme to scheme. Some lenders charge no processing fee while others charge a nominal amount. Both SBI and Bank of Baroda charge a processing fee of INR 10000 + GST on study abroad loans. Among private banks, Axis Bank does not charge any processing fee for study abroad education loans of up to INR 20 lakhs and INR 750 per lakh for loans above INR 20 lakhs. ICICI Bank on the other hand has a processing fee of 1% of the loan amount +GST. NBFCs such as Avanse and InCred have a processing fee between 1% and 1.5% of the loan amount while Auxilo has a processing fee between 1% and 2% of the loan amount. 

The moratorium period is that time during which the lender exempts the borrower from repaying the education loan. Even though the duration of the moratorium period may vary from bank to bank, this is offered by all government and private banks. Most banks offer a moratorium period of one year after the completion of the course as the moratorium period. It should be remembered by readers here that the borrower is exempt from repaying the loan during the moratorium period but the interest that has to be repaid during the moratorium period only gets deferred and not canceled. It means that the borrower will pay this accrued interest later when they start with their loan repayment. 

Government banks are the best bet when you want an unsecured loan amount of less than INR 7.5 lakhs. Nationalized banks are also best for those who need higher loan amounts and have collateral to pledge. 

For those who do not have collateral to pledge and need loans above INR 7.5 lakhs and up to INR 40 lakhs, private banks are the next best option. 

NBFCs should be the last option as they have the highest rate of interest. 

Preference: Public sector banks > Private Banks > NBFCs

The interest paid on an education loan is eligible for tax deductions under Section 80E of the Income Tax Act, 1961. This tax deduction can be availed for 8 years or till repayment of the interest, which is earlier. If the parent is repaying the loan, they can be eligible to avail of this deduction. It should be remembered here that only a single taxpayer, either the student or the parent, can claim this deduction from the time he starts repayment of interest of the loan. 
Students get double tax savings when they take an education loan. The second saving is when tax is deducted at source (TDS). Students who take an education loan get a 0.5% discount on TDS. You can read more about this here. 

Once a borrower starts repayment of his education, he needs to inform the HR or accounts department of his office about the interest being paid on the education loan. This will ensure that less TDS is deducted from your salary. To get tax exemption on your education loan, the borrower also needs to request his lender to issue a certificate that states the amount of interest the borrower has paid on the education loan in that particular financial year. The tax deduction under Section 80E is over and above the INR 1,50,000 deduction that is permitted under Section 80C. If the borrower fails to inform the accounts department, then he will have to claim it by filing for income tax returns. 

Once an education loan application has been sanctioned by the lender, the borrower needs to accept the offer by signing all the sanction documents. But the work is not done yet as the loan disbursement process is still pending. Since the amount of loan the bank disburses on the proof of expenses, the borrower needs to arrange for documents for the same. The borrower can keep these documents ready to expedite the disbursement process. Once the proof of expenses has been submitted, the bank then sends a final disbursement letter with the final loan amount. This letter has to be signed and accepted by the borrower before disbursement can commence. Once this has been done, the bank makes the final disbursement of the education loan. 

Some countries, such as Canada, New Zealand, and Australia require the tuition fee to be deposited before approving the visa. In such cases, students find it difficult to get this done on their own. In this case, GyanDhan can help them by coordinating with the bank and helping in timely disbursement.  

For students who take an education loan from a nationalized bank, the loan repayment starts after the end of the moratorium period. Repaying an education loan is no rocket science and all that you need to do is get in touch with your bank manager. The manager will initiate the repayment process with an auto-deduct mode. Most government banks give borrowers 10 years to repay the loan. 
The repayment process for NBFCs however is different. Borrowers who take an education loan from an NBFC have to make interest payments even during their period of study. Some NBFCs mandate full payment of interest during the study period while a few allow partial payment of interest during the period of study. Once the moratorium period finishes, the full loan EMI will commence.

The education loan is repaid in EMIs or equated monthly installments. This EMI includes both the principal amount as well as the interest. During the initial years, the EMI includes more interest and less of the principal amount. Gradually, as the loan gets repaid, the principal component increases in the EMI. The EMI on your education loan depends on your loan amount, rate of interest, and loan tenure. Students can visit GyanDhan’s EMI calculator tool and know how much their monthly EMI would be for different RoI, and tenures.