Guide to Education Loans to Study Abroad
Types of education loans, eligibility, interest rates, repayment period, best companies for international students
Technology, and better standards of communication, are among the primary reasons why students have become extremely mobile over the past couple of decades. For instance, about 5% of the total university student population, in the US, is international. Popularity, standard of education, resources, and employment opportunities, have made professional programs like the MBA, EMBA, Law, Engineering, and other Masters programs, especially attractive as well as exceptionally expensive.
A lot many well qualified, and well deserving, student recruits often find themselves sufficiently talented but insufficiently funded to handle the expenses that are associated with these degrees. Scholarship is an avenue but not available to everyone.
As a consequence, the option of education loans – government or private – are the 21st century guardian angels bearing the burden of education costs on behalf of students who could use some financial help towards a degree.
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In this article, we will lay down the basic information pertaining to financing your education through the option of organizations that provide international education loans.
These organizations have established themselves as a viable alternative to the loans offered by banks, for instance in India, whose limit is set far from the total cost of the tuition demand of some of the professional programs like MBA, or medicine.
So here is everything you need to know about international education loan, and its providers.
What is an Education Loan?
There are home loans, business loans, car loans, personal loans, and there is the lone ranger, the education loan. It is unlike any other regular money lending scheme and begs some amount of understanding if you are a would-be student and are, in the wise words of the Beatles foursome, looking to get by with a little help from your friends!
How is an education loan different?
The purpose, for an education loan, is quite distinct and well defined as compared to another, say, personal loan. The borrowed money can only be used towards the fulfilment of a degree, or associated expenses. The interest rates are lower for an education loan as compared to other loans and the interest itself is tax deductible.
In other words, though a personal loan can, in principle, be used towards education, it lacks the advantages of the financial relief afforded by an exclusive education loan.
How does an education loan work?
You cannot qualify for a student/education loan unless you have an admission offer from an accredited school. The admission offer is used to evaluate your creditworthiness for external financing. Once the accepting institution is able to provide a total estimate of the tuition and associated costs, the nature of your degree determines whether you will be good for the money. That is, whether you will be able to secure a job to repay your loan in the future.
Many loan providers require a guarantor or cosigner to ensure loan security. Education loans usually don’t require a collateral, a tangible property put up against the loan amount to secure its repayment. A student loan is also never lent directly to a borrower.
The disbursement occurs to the education institution and students usually interact with their respective school financial aid offices to manage their expenses. That way, providers work directly with the institution instead of individual accounts.
When does the repayment start?
Loan repayment, with interest, is usually not due until a grace period after graduation, for full time students. This grace period of six months, along with the full time program duration, is particularly useful for international students who aren’t allowed to work with a student visa. The ability to defer monthly repayments provides freedom from financial stress while studying.
There are categories within the repayment schedules. Depending on the loan provider, you can either choose to begin repayment (principle amount plus interest) after the grace period, OR you can choose to begin paying the interest amount right after loan disbursement. The different repayment schemes allow you to choose from different final repayment amount – paying later for a larger repayment amount vs paying early for a total less repayment amount.
Kinds of Education Loans
Essentially there are two types of student loans – federal vs private. In the US, for instance, federal loans are only available to US citizens. That is generally true for most countries.
The advantages of a federal loan are obvious. The interest rates are lower and some federal loans have the ability to be consolidated, that is combine all student loans upon graduation, to ease the repayment procedure. Federal loans also don’t require a credit check.
Private loans, on the other hand, are more widely available but usually require a cosigner to act as a backup, in case the borrower defaults on repayments.
Types of degrees for student loans
Student loans, for internationals, are granted based on the futility of their degree, in terms of employment. While most loan queries usually fall in the MBA turf, and other business degrees, many other finance, medicine, engineering, technological, or law, Masters degrees are lucrative enough to get ready financial support from lenders.
PhD degrees are often supported by Teaching, or Research, Assistantships that take care of tuition, health, and a basic stipend.
As mentioned above, private loan providers usually don’t need a collateral. However, they often do require a cosigner who can be your loan partner. If you are an Indian / international citizen looking for an education loan, say for an MBA program in the US, you will need to identify a current US permanent resident, perhaps a family member or a friend, who has a respectable credit score.
By being a cosigner, the individual will be the proxy credit bearer who will be responsible to repay the loan in the event you default on your payments. While this is a nifty system for many internationals who don’t have a foreign credit score vouching for their borrowing history, finding a cosigner who is willing to risk their future credit score on your conscientiousness, is often a difficult task. For the same reason, loan providers, who don’t need a cosigner, are quite popular.
In these cases, the loan providers work with well known institutions, chalking out a model to identify credit worthy applicants. Companies like Prodigy Finance, for instance, don’t need a cosigner and yet have a record high repayment statistic to back their model.
Interest Rates, and Repayment Period, for Study Abroad Loans
Though interest rates, on Federal loans, are significantly lower, at about 5%, it is still largely unavailable to international students. As far as private international loan providers are concerned, the interest is usually decided upon by considering the global nature of the lending scheme.
There are a few global indices that are used to decide upon the variable base interest rate.
- Prime Interest Rate, decided by the US Federal Reserve.
- LIBOR, the London Interbank Offered Rate, decided by the British Banker’s Association, and dependent on the interbank lending rate in the UK.
- Euribor, which is the interbank lending rate in Europe.
An additional interest is added to one of the variable base rates, to make up a subjective interest rate for each student loan applicant. The additional amount is usually decided upon by the creditworthiness of the cosigner, or in the case of a non-cosigner loan, by the quality of degree and institution.
This additional rate is usually of the order of less than 10% above the variable base rates. An additional one time application fee (a small percentage of the principle amount), and an APR is also charged.
The repayment period is usually of the order of 10-25 years, including the grace period.
Best Education Loan companies for International Students
There are many international student loan providers that function around essentially the same principle of financing applicants, in professional degrees with a promising future, with or without a cosigner, and involving a reasonably stress free repayment scheme. Prodigy Finance, for instance, is a well known financing company that works on the model of community finance, with reasonable interest rates.
The funding comes from business school alumni investors, high net worth individuals, the business school community and institutional investors. They evaluate the future potential, of the applicants, based on their past as well as the expected salary increase, upon graduation. There is no collateral, or cosigner, required.
However, with a history of 99% repayment fulfilment, they have become an attractive investment oppurtunity for the business network. The overall gains is three fold with the investors, business schools, and finally the students gaining a whole lot from the community funding arrangement.
Try this link for a comparison of study loan options in India for studying abroad – Indian Banks vs Prodigy Finance – Education loans in India for studying abroad vs Prodigy Finance.
We will update the list of companies as and when more competitive financing schemes come within our radar. Stay tuned for more.
Education Loan Eligibility
Now that you are sufficiently aware of the loan machinery, it is natural to find out what are the individual applicant requirements to be considered for a funding hand. Most private lenders have associations with the financial aid offices of accredited schools.
The approval process usually takes a few weeks. The best way to find out about your eligibility is to visit the company page, upon receiving an admission offer from a recognized school. Here are the eligibility criterias to be taken as a general thumb rule.
- An acceptance offer from an accredited school, in a program that falls under the loan sphere of the financing company – eg: MBA, EMBA, Masters in professional, technological, engineering fields.
- The applicant should be a foreign national and not a resident of the country where the school is located. In the US, foreign applicants with a prior history of 7 consecutive years of residence, are ineligible to apply. In other countries, non-permanent residents with 1 year of living/working history are also ineligible. The only exception is UK residents applying in the UK.
- The applicant should not have delinquent payments affecting their creditworthiness.
- Applicants should qualify other global checks that check for the absence of criminal affiliations, as well as verify the criteria for Politically Exposed Persons.
- For loans that require a co-signer, the co-signing individual should be a permanent resident with a good credit history.
This article essentially summarizes the technical information needed to go about your education loan research. We would encourage you to speak to the University Financial Aid offices and compare notes with previous students, while also assessing various financing companies. Meanwhile, here are a few links for a better insight.
- Graduate funding for masters degrees
- When Indian Banks reject your Masters study abroad loan?
- How students can reduce their international education loan burden?
- 5 Factors to compare when choosing an International Graduate Student Loan
- How responsible lenders are tackling the student loan debt crisis?
Read more about graduate school funding for masters degree programs.