Taking a loan to study abroad? Be prepared to pay margin money of 10-25%

Those getting admitted to non-STEM courses and lower-grades institutes must be prepared for stringent checks, higher interest rates, and more collateral requirement

The State Bank of India (SBI) has raised the limit for collateral-free education loans under its Global Ed-Vantage scheme to Rs 50 lakh, a significant increase from the previous cap of Rs 7.5 lakh. This move aims to support students who have been admitted to select international universities. SBI also offers zero-collateral ‘Scholar Loans’ for students at premier Indian institutions. 

 

“Collateral requirement for foreign education loans has been a major barrier for economically constrained families. SBI’s latest initiative aligns with global standards,” says Keval Bhanushali, co-founder and chief executive officer (CEO), 1 Finance.  

 

Non-banking finance companies (NBFCs) also provide high-value unsecured loans. “At present, NBFCs that deal with specialised education loans have high-value unsecured loan options for better-ranked institutes, and for meritorious students,” says Nilanjan Chattoraj, director-education loans, InCred Finance.  

 

Obstacle courses 

 

Next, let us turn to the key hurdles students face when they need a large loan amount for foreign studies. 

 

High interest rates and hidden costs: Many players offer loans that come at a high cost. “These include high interest rates, processing fees, and hidden charges,” says Vibha Kagzi, founder and CEO, Reachivy.com. She suggests comparing loan options across banks and NBFCs. Students admitted to reputed foreign institutes can also negotiate interest rates and other fees. 

 

Collateral requirements: While collateral-free loans are available from SBI, several private banks, NBFCs and fintech lenders, a number of students still need to meet strict eligibility criteria. “Students who meet a lender’s eligibility criteria, such as a strong academic record or admission to a reputed institute, can access loans with ease. However, those who fall short may need to provide collateral or a co-borrower. The family’s income stability and good credit scores can help,” says Adhil Shetty, CEO, Bankbazaar. 

 

Under- and over-estimating loan amount: Borrowers must consider all costs associated with studying abroad, including tuition fees, living expenses (rent, food, entertainment, etc.), and miscellaneous costs (laptop purchase, travel, reading materials, etc.). “Speak to the university’s alumni and use online tools to get a better idea,” says Chattoraj. 

 

Overestimating expenses can also prove a burden. “Borrow what you need. Avoid spending on luxury items. Supplement the loan with savings, scholarships, and part-time work,” says Kagzi. 

 

Have a buffer for unexpected challenges that may arise during studies. “Students must be prepared to navigate unforeseen challenges — problems in the nation where the university is located, personal or family difficulties,” says Sonal Kapoor, chief commercial officer, Prodigy Finance. 

 

Extensive documentation: Lenders require proof of admission, academic records, fee structure, and income related documents of guarantors and co-borrowers. Some may also request credit scores and tax returns. “Go through the list of documents mentioned by the preferred lender,” says Shetty. 

 

Processing time: Lenders differ in processing times. Some offer provisional loan approvals before the admission letter is issued. “Starting the loan process early, ideally after shortlisting universities, helps avoid last-minute hassles,” says Chattoraj. 

 

Margin money: Borrowers must pay a portion of expenses, known as margin money, out of their pockets. “This can be 10-25 per cent, depending on the lender and loan,” says Kapoor. Visa fees, health insurance, travel, living and other ancillary costs may have to be met by students themselves. 

 

Non-STEM courses, less-reputed universities: Loans for non-STEM (science, technology, engineering, and mathematics) courses or lower-ranked universities often come with higher interest rates, additional collateral and margin requirements, and stricter repayment conditions. “Lenders scrutinise such applications more carefully to determine employability and earning potential,” says Kagzi. 

 

Selecting the right lender 

 

When choosing a lender, borrowers should consider interest rates, repayment terms, and a host of other factors. “Some lenders offer competitive rates based on future earning potential. Full-time students get a six-month grace period after graduation to start repayments,” says Kapoor. 

 

Shetty suggests starting with one’s existing bank to leverage an existing relationship. “Public sector banks, in particular, provide a wide range of loans for long and short-term courses with competitive rates,” he says. 

 

Investors must scrutinise the terms for early exit. “Check for fees for foreclosing the loan,” says Bhanushali. 

 

Chattoraj suggests verifying whether the lender supports funding for the chosen country and course.  

 

Common mistakes to avoid 

 

Borrowers should avoid underestimating or overestimating loan amounts. “Borrowing less can be risky due to job uncertainty and unexpected costs,” says Kapoor.  Delaying loan application can prove costly. “The visa process often requires proof of financial support, so starting early is essential,” says Kapoor. 

 

Students must also understand how disbursements work. “Not knowing whether the loan will be disbursed in instalments or a lump sum can lead to confusion,” says Kagzi. She also suggests having an emergency fund for medical issues, changes in course-related expenses, and so on. 

 

Overspending on living expenses is common. “Prepay loans whenever possible, reduce expenses, and work with lenders to restructure if repayment becomes difficult,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi) registered investment adviser and founder, SahajMoney.com. 

 

Parents should note that they are equally responsible for loan repayment if the student defaults. “Ensure repayment does not affect your retirement plans or essential expenses. Evaluate whether the loan aligns with the child’s earning potential after graduation,” says Kumar. 

 

(The writer is a Mumbai-based independent financial journalist)