Education loans: From India or US?
Interest rates are favourable in the US. However, either the university or a greencard holder should be a guarantor.
Planning to study abroad? Most students’ first thought would be to take an education loan. And, the cheaper the rate, the better.
For students applying to US universities, there is another option to garner funds. Provided they have a guarantor – a green card holder or, in some cases, if the university stands the guarantee – they can avail the loan in the US itself.
According to data from the Open Door Report published by the Institute of International Education, US was the preferred destination for Indian students, with 104,897 of them opting for courses in 2010.
According to Karan Gupta, an education consultant, countries like UK, Australia and New Zealand require students to make a partial or complete payment of fee as a visa requirement. Therefore, the funding has to be done from India itself.
Most US universities have tie-ups with banks like Citibank and institutes like Sallie Mae which provide student loans. The university is the guarantor to the loan. However, after the 2008 recession, the number of universities offering such facilities and the courses for which the loans can be availed have come down.
The other option is to directly approach these institutes for a loan. However, one needs to have an American citizen as a guarantor in such cases.
COMPARISON
Opting for loans from US banks works because of the low interest rate they offer. Currently, loans sanctioned through US universities charge interest at around 7 per cent. In contrast, education loans from Indian bank are expensive. For instance, State Bank of India and Axis Bank extend loans at 12.75 and 14.75 per cent, respectively.
Loan repayment tenure is longer in the US. According to educational consultants, management and technical courses for which loans are offered cost around Rs 45-50 lakh and the equated monthly installments for these works out to at least Rs 1 lakh. Thus, the students would either need high paying jobs on the completion of the course or be given the option of longer tenure to repay the loans.
While university backed loans have a tenure of 20 -30 years, those availed directly through banks are shorter, at 15 years.
In comparison, most Indian banks have a repayment tenure of around 7 years. If you opt for a loan through Credila, an education loan company by HDFC limited, the tenure is longer, at 10 years. Also, the quantum of loan disbursed in India is capped at Rs 20 Lakh. However, officially, there is no cap on the amount in the US. "Lenders fix their own parameters depending on the course and degree level," says Gupta.
GUARANTORS AND CO-BORROWERS
Most Indian banks ask the parents to sign up as co-borrowers and pledge collateral in case the loan amount is higher than Rs 7.5 lakh. However, some banks may be willing to forego the collateral, says S Govindan, GM (personal banking), Union Bank of India. "This could differ on a case to case basis. Depending on the family’s standing, just a guarantee could also be sufficient," he adds.
In the US, banks will look at your guarantor’s credit history before giving a loan. In case you plan to return to India, you will have to foreclose the loan, else, your guarantor will be held liable.
LOWERING LIABILITY
Whether in India or the US, students are expected to start repaying six months after completing the course. "However, there is nothing that stops them from making early payments, at least, the interest component, to reduce liabilities," says V N Kulkarni, chief Counsellor, Abhay Credit Counselling Centre.
While the course is underway, banks charge only the interest component, and that too, on a simple interest basis. There is no compulsion to pay off this portion while still studying, but doing so would help as once the repayment begins, calculations are done on a compound interest basis. The additional interest burden could mean a huge payout.
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