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The admission season is in and many of you might be thinking of applying for an education loan abroad. When you seek your parents' advise on the same, they would clearly ask you to consider an Indian public bank/NBFC. Those who have already done their homework on education loans may know that apart from Indian banks/NBFCs, you have an option of applying through foreign NBFCs as well. You may have heard of the Prodigy finance student loan schemes and also those of MPower finance.
Before you decide to proceed with your application to these lenders, think along these lines. What are the drawbacks of approaching foreign lenders? When should you think of applying for loans through them? Are they really the best option for abroad education loans? How would you benefit by applying to an Indian bank/NBFC? With this article, we tell you about the drawbacks of Indian students borrowing loan from foreign lenders.
Or better yet, hear all about it from Damini, the Co-founder of WeMakeScholars and the speaker in Part 1 of the 10th episode of Loanflix, below.
When it comes to borrowing an education loan from a foreign lender, one needs to be clear about their loan policies. For instance, did you know that the Prodigy finance student loan schemes do not require a local co-applicant? Who is a local co-applicant? Is a co-applicant necessary to apply to a foreign lender for an abroad education loan? Also, did you know that Indian students can avail a tax exemption on their interest amount when they apply through Indian banks/NBFCs? If you have just heard about these facts and don't know much about them, don’t worry.
We cover all of it in Part 1 of this article. Since we plan on covering a huge range of important factors, this article is divided into two parts. With both parts of this article, we hope to achieve the aim of clearing your doubts regarding all the major and minor factors of applying to a foreign NBFC for an education loan. Also, do make it a point to continue reading Part 2 of this article to know about all the points.
Types of Foreign Money Lenders
International education loan lenders can be divided into two categories
Those who do not ask for a local co-applicant:
Eg: NBFCs like Prodigy Finance, MPower Finance.
Those who ask for a local co-applicant:
Eg: Citizens Bank, NBFCs like Discover Student Loans, Sallie Mae (US), Future Finance (UK).
Who is a local co-applicant?
A local co-applicant is a person who holds a passport of the country where the applicant is studying/ planning to study. The co-applicant has to be a local citizen of the country. Generally, many candidates who decide to opt for international student loan lenders do not have local co-applicants. Hence, the student loan policies of only the first type of foreign money lenders will be discussed. (those that don't need a co-applicant)
There are two foreign NBFCs that provide education loan abroad without a local co-applicant include:
- Prodigy Finance
- MPower Finance
Let’s take a look at their student loan policies.
Prodigy finance student loan
Who can avail for student loans from Prodigy Finance?
Those who want to pursue MBA programs in Business schools abroad. Those who want to pursue their master’s program in any engineering field, preferably for STEM programs with universities in a few US and Canadian states.
- Interest rates for Prodigy finance student loan: The effective interest rate for Prodigy finance student loan is the Annual Percentage Rate (APR). This is mentioned in the loan sanction letter. The average APR offered by Prodigy finance student loan schemes for Indian nationals is 9.41%.
- Expense Coverage: Prodigy finance claims to cover up to 100% of a student’s total expenses. However, this is possible under certain conditions only. To know what these conditions are, do check out part 2 of this article.
MPower finance student loan
Another foreign NBFC that offers student loans without a local co-applicant is MPower Finance student loan. Let us take a look at their policies regarding education loan abroad.
Who can avail education loans from MPower Finance?
MPower Finance offers loans to students who want to pursue any kind of Master’s programs from the USA and Canada.
Interest rates for MPower Finance student loan: As of today, the APR stated by them is 12.94%. Under certain conditions, they offer a waiver on the interest rate. After the waiver, the total APR comes to 10.91%.
Expense Coverage: MPower finance can give you a maximum of $ 50,000 for the whole course or up to $ 25,000 per year. There is no repayment holiday granted. A candidate must start repaying the full interest immediately after the course begins.
We hope that you must have understood the basic student loan policies of foreign NBFCs that offer education loan abroad. Moving ahead, let's take a look at the drawbacks faced by Indian students, should they choose a foreign lender for an abroad education loan.
Read more about Prodigy Finance and Indian Public banks: Myth vs Reality
Drawback 1: Processing fees
Indian Public Banks:
- The processing fees charged by Indian public banks do not go beyond Rs. 10,000.
The fee breakdown can be explained as follows:
The processing fee charged by Indian government banks ranges from no charges to Rs.10,000, depending on individual cases and the bank they choose.
- Students who have opted for a collateral education loan will have to spend a little more on legal, valuation, and mortgage creation charges. The total spent adding all these does not go beyond Rs. 25,000.
- Indian NBFCs and private banks charge around 1% of the total loan amount as processing fees. For instance, if a loan of Rs. 50 lakhs is taken, then only 1% of that amount, i.e, Rs 50,000, is charged as a processing fee.
Foreign money lenders charge 2% - 4% of the total loan amount as a processing fee. However, this is a liability as the interest levied on the processing fees is also adjusted in the loan amount itself. For example, if the loan amount is Rs. 50 lakhs, then the total processing fee charged by foreign NBFCs can be calculated as;
2% of Rs. 50 Lakhs = Rs. 1 lakhs.
From the above calculation, it is clear that the processing fees charged by foreign NBFCs are way higher than those charged by Indian banks/ NBFCs.
Drawback 2: Floating Interest rates
Before we get into the details here, let's understand terms such as LIBOR and MCLR, which are used by lenders to calculate the overall education loan interest rate.
London Inter-Bank Offered Rate (LIBOR)
LIBOR (London Inter-Bank Offered Rate) is the benchmark rate used by foreign banks and NBFCs to lend loans. This rate is an average value of the interest rates submitted by different banks and NBFCs located globally. Check this statistic by Statista about LIBOR interest rates, and you may observe that it is increasing very fast again. The table will help you get a clear understanding of the fluctuation in their rates in recent years. LIBOR is expected to increase by 1-2% in the next 2 yrs after the sudden fall due to the pandemic in 2021. Refer to the statistic given above.
Please note that the interest rates provided by Prodigy finance student loan schemes are never fixed. They vary from one student's profile to another.
Let us take a look at how the final interest rate for Prodigy finance student loan is calculated. These calculations are made by taking into account the latest LIBOR values. The final interest rate i.e. A.P.R includes LIBOR + Interest rate + other costs. So, when an applicant applies for an education loan through Prodigy Finance student loan, the interest rate is calculated as:
Interest rate = 1% (Current LIBOR) + 6-7% (Prodigy's interest rate) + other costs (%)
LIBOR Rate (USD)
0.76% (Year Close)
3.01% (Year Close)
0.43% (Year Close)
1% (Year Close forecast)
In the above table, you may have observed that the LIBOR interest rates were increasing almost every year till the pandemic hit. As shown in the table, LIBOR is expected to go up by almost 1-2% within the next couple of years since the world is opening again. So, a student who had taken a foreign education loan in 2014 and is still repaying the loan amount, is doing so with a 2% higher interest rate than what he was promised at the time of sanction.
Marginal Cost of Funds based Lending Rate (MCLR)
MCLR (Marginal Cost of Funds based Lending Rate) is the basic rate on which Indian banks and NBFCs fix their interest rates for different short-term loans. MCLR is the Indian counterpart of LIBOR. Let us consider how an Indian bank like the SBI calculates the interest rates for an abroad education loan.
The final interest rate (ROI) = MCLR + Bank’s premium - other discounts
So, If an applicant applies for education loan through SBI, the interest rate will be calculated as follows:
Interest rate = 6.75%(MCLR) +1.4%(Bank’s premium) - 0.5% (Rinn Raksha insurance scheme waiver) = 8.15 %
Students who have also opted for the Rinn Raksha insurance scheme get a 0.5% waiver in the interest rate. So, for male candidates who apply for a foreign education loan with SBI, the final interest rate (including the Rinn Raksha discount) comes to a total of 8.15%. There is a 0.5% discount in interest rates for female candidates. This, coupled with the Rinn Raksha insurance scheme waiver brings the total interest rate fixed by SBI for female candidates to 7.65%.
Let us take a look at the growth in MCLR over the years.
SBI MCLR rate
If you take a close look at the above table, you may come to notice that it has been in fact decreased 1.35% in MCLR over a period of almost a decade, and the MCLR is expected to go up by only 0.12% in the next couple of years.
The above calculations will help you determine how much amount will be repaid by borrowers if they decide to opt for an Indian Bank like SBI and how much is to be repaid if the applicant opts for MPower finance or Prodigy finance student loan.
Drawback 3: Income Tax exemption & other Govt. of India provisions
Are you aware that Section 80 E of the Income Tax Act, by the Government of India, has a provision under which Indian students who have taken education loans from Indian banks/NBFCs can avail income tax exemption on the interest amount? Yes, such a clause exists!
Simply put, section 80 E of the Income Tax Act states that Indian students may avail tax exemption on the interest amount under this section, depending on the applicant's/co-applicants yearly income and the loan amount borrowed.
Refer to the below table and consider the following example to understand this concept better.
Annual taxable income (in Lakhs)
Tax exemption on the payable interest
Up to 5
The above table shows the tax exemption applicable to the corresponding annual income group. Let us consider the below example to give you a clearer picture.
Assuming that a loan applicant had borrowed Rs.10 Lakhs as education loan from an Indian bank like SBI at 10% rate of interest. In such a case, the amount paid by the candidate as interest will be Rs.1 lakh.
Let us assume that their co-applicants taxable income is more than 10 lacs. They happen to be in the 30% bracket according to the above table.
When we put it in a simple way, according to the general rule, for every Rs. 1 Lakh paid by the applicant as the annual interest amount, Rs. 30,000 will be deducted as income tax by the Government of India.
For education loans, under Section 80 E, this amount becomes tax-free and you get to save that Rs. 30,000. So, the effective interest amount he/she pays for Rs. 10 lakhs is only Rs.70,000, and not Rs.1 Lakh. From this example, we can understand that Rs.70,000 constitutes only a 7% interest rate on the total loan amount and not 10%. And this advantage is only applicable to Indian students.
Apart from the above points, Indian students can avail themselves of more such options where they can save on the interest amount.
For example, the Indian government offers many subsidy schemes to applicants belonging to Minority communities, Other Backward Classes (OBC), and Economically Backward classes. Under these schemes, an applicant may avail of an exemption on the interest amount to be paid during the moratorium period. This helps you save a few lakhs.
These small factors are often ignored by loan applicants while considering options for abroad education loans. This is another factor to be considered while deciding who to approach for an education loan.
Another important point that you, as an applicant must be aware of, is that Indian public banks do accept retired professionals, those who have limited/no source of income or those who do not have ITR documents, as co-applicants. There is no rule that states otherwise. Please do not let these reasons stop you from applying to Indian banks for abroad education loans.
Too many numbers and calculations, right? This is exactly why we have divided this article into two parts. This topic does not end here. There is more to come in Part 2 on this topic. Here's a sneak peek of what you can expect in Part 2
Did you know about Interest rate parity? How does it affect the final loan amount to be paid by loan applicants? What is the loan margin set by Prodigy finance student loan? The explanation to these doubts and a detailed explanation of many more such factors await you in the second part, which is titled ‘International education loan: MPower finance and prodigy finance foreign education loan’.
If you are amongst the hundreds of students who are not very clear about their abroad education loan concepts, both parts of this article are for you. Speak with our financial officer to get help and assistance. Also, check your eligibility for the best education loans matching your profile.
Note: WeMakeScholars is an organization funded and supported by the Government of India that focuses on International Education finance. We are associated with 10+ public/Pvt banks/ NBFCs in India and help you get the best abroad education loan matching your profile. As this initiative is under the Digital India campaign, it is free of cost. The organization has vast experience dealing with students going to various abroad education destinations like the US, Canada, UK, Australia, Germany, Sweden, Italy, China, France among others.