Many students dream of pursuing higher education in foreign countries. And education loans help these students fulfill this dream by helping them cover the expenses associated with foreign education. However, many students don’t know the impact of currency exchange rates on the repayment of student loans for abroad education.

This article covers the information on what currency exchange rates are and how they influence foreign education loan repayment. We have also provided various strategies to manage currency exchange risk on student loan repayment to help manage your finances while studying abroad.

What are Currency Exchange Rates?

Currency exchange rates represent the value of a country’s currency compared with another country’s currency. They help us understand how one currency can be converted to another. For example, a student took an education loan in India to pursue higher studies in the US and needs to pay USD 10,000 for the tuition fees. If the current exchange rate is 1 USD = INR 84.58, then he would need to transfer ₹845765.58 for the tuition fees, accordingly.

Understanding the foreign exchange rates is crucial for students taking an education loan to study abroad. These exchange rates significantly impact the repayment of education loans for studies abroad. A country's currency exchange rates are not constant and fluctuate depending on several factors, such as its economic conditions, interest rates, and inflation.

Factors Affecting Currency Fluctuation

The foreign exchange rates of a country fluctuate depending on the following factors:

Economic condition of the country:

A country’s economic conditions, including its GDP and employment ratio, play a huge role in its currency exchange rates. A country with a stable economy and a high employment rate leads to a strong currency.

Interest Rates:

This is another major factor influencing the currency exchange rates. When a country offers higher interest rates for credit, it attracts foreign investors and increases the demand for the currency. This ultimately increases the value of the currency. On the other hand, lower interest rates can reduce the value of the currency.

Inflation:

A country’s inflation directly influences the price of goods and services offered in it. Higher inflation leads to an increase in the price of goods and services in a country. This reduces the purchasing power and depreciates the value of the currency.  And when a country experiences low inflation, it increases the purchasing power and attracts foreign investors. This strengthens the currency and increases its value.

Abroad Education Loan and Currency Fluctuation Rates

Now that you have understood about currency exchange rates, let’s look at the importance of currency fluctuations for education loans. Currency fluctuations significantly influence student loans for international studies by affecting the loan amount and total repayment cost which we will discuss further in the article. 

For instance, let’s assume a student took an education loan of USD 50,000 with a tenure of 10 years and an interest rate of 10% per annum to study in the US. If the exchange rate at the time of loan sanction is 1 USD = 75 INR, the loan amount equals ₹37.5 lakhs. Repayment of the loan starts after the completion of the moratorium period, which will take at least 2 years. 

Now, there are two possible scenarios; in the first situation, let’s assume that the exchange rate remains the same during this period, which means the loan amount will also remain the same.

In the second situation, if the exchange rate changed to 1 USD = 85 INR during this time, this would increase the loan amount to ₹42.5 lakhs. This ultimately increases the total loan cost, affecting how much the student has to repay towards the loan.

Impact of Currency Exchange on Student Loan Repayment?

Students taking a foreign education loan should understand the currency exchange effect on student loan repayment to manage their finances efficiently. The significant effects of foreign exchange rates on the repayment of student loans are:

Increases the Loan Amount and Repayment Cost:

The currency exchange rates can influence the loan amount of an education loan. As we can see from the above example, fluctuations in the exchange rate increased the loan amount from ₹37.5 lakhs to ₹42.5 lakhs. As a result, the student ended up repaying more than they originally borrowed from the education loan. 

Increases Interest

This heightened loan amount leads to an increase in the interest part of the loan. Coming back to the above example, due to the change in the exchange rate, the student has to pay interest on the new loan amount. This increases the total interest payments on the entire loan tenure than what the student had expected before. 

Affects the Monthly EMIs:

This is one of the major student loan repayment factors influenced by the currency exchange rates. When the student took an education loan of ₹37.5 lakhs at an interest rate of 10% and a 10-year tenure, the student would assume that the EMI of the loan as around ₹49,500. However, due to the increased loan amount and interest, the EMI will become ₹56,250. This adds a financial strain on the students and their families. This is how currency exchange rates affect the repayment of student loans. 

Tips to Reduce the Risk of Currency Exchange Rate Effect on Student Loans

The following are the tips that can help you manage the currency exchange risk for foreign education loans:

Monitor Exchange Rates:

You should regularly monitor the current exchange rates to reduce the risk. Regularly track the exchange rates and their trends. Tracking currency trends and market conditions can help you understand when to transfer or convert the money from your loan funds. This can help you manage currency exchange risk to efficiently manage your finances.

Consider Using Hedging Strategies and Forward Contracts:

These are risk management techniques that can help you avoid paying more on your foreign education loans due to currency exchange rates. Hedging involves using financial instruments to reduce currency exchange risk. And forward contracts allow you to lock in an exchange rate to avoid paying more.

Use Forex Cards:

Using forex cards is in of the most popular ways to manage currency exchange risk for student loans. These cards are specifically designed to help international students manage their finances. The biggest advantage of using a forex card is that these cards can allow you to lock in the exchange rate. This can help you avoid fluctuations and manage your expenses while studying abroad.

Establish a Currency Buffer:

Set aside a portion of funds to cover any unexpected expenses due the currency fluctuations. Having a financial buffer can help you manage the risk of currency fluctuations. It can provide stability and reduces the financial stress of the students while repaying the loan.

Conclusion

Currency exchange rates significantly impact the repayment of education loans for overseas studies. It is crucial for students to know about the effects of currency fluctuation when they are planning for a student loan for abroad education. In this article, we have explored the implications of currency exchange rates on the repayment of foreign education loans. We have also covered various strategies to manage currency exchange risk to help you manage the repayments on your abroad education loan.