If you’re like the majority of students, you’ll need an education loan to transform your dream into a reality. And, you’ll need to get into the specifics and understand your loan as quickly as you can so you can focus on what really matters - getting an admit and excelling in your programme.
You’ll be smart to weigh two types of cost: financial and emotional. Financial cost is money out of your pocket over a period of time. Emotional cost is your time and effort involved in the loan process, and any resulting stress or anxiety.
With this in mind, here are four questions that will help you to get to the true cost of your education loan so you can get on with it.
Things to remember while selecting a Student Loan:
- Is this a secured or unsecured loan?
- What are the components of my interest rate?
- What fees will I incur?
- Is there repayment flexibility?
Secured Education loans versus unsecured loans
Secured loans require collateral or co-signers. These elements provide lenders with some surety that they’ll be able to recoup their money even if you default. And, in some countries, it’s difficult to obtain an education loan without security.
Understanding co-signers and collateral requirements
A co-signer is another individual willing to be legally obligated to repay the full cost of your loan if you don’t or can’t.
Collateral usually takes the form of fixed assets, such as property or land. Loans requiring collateral are given on the premise that if a borrower defaults on his or her loan, ownership of the fixed assets provided will transfer to the lender. If this occurs, the lender can liquidise these assets as they see fit.
As a general rule, secured loans carry lower interest rates as the borrower’s risk is reduced in the eyes of the lender.
But here, the risk for the borrower extends beyond financial to emotional. A home your family has worked for years to own could quickly fall under the ownership of a bank. You will have to ask yourself whether you are willing to risk your family’s valuable asset.
Are there unsecured Student Loans?
Absolutely. These loans work on the borrower’s creditworthiness: the strength of your credit history and any other factors a lender may use.
While unsecured loans previously carried higher interest rates, innovative technology and efficient operations have allowed some lenders to reduce these rates. Prodigy Finance provides unsecured loans at competitive or even less expensive interest rates than secured loans.
Understanding interest rates on Education Finance
Interest is the amount you pay the lender for the right to use their money.
There are two types of interest rates:
- Fixed interest: the rate stays the same for the duration of the loan
- Variable interest: the rate fluctuates depending on an agreed-upon variable base rate
As a general rule, fixed interest rates are higher than variable rates, as you’re paying a premium to “lock in” a rate. However, the majority of education loans use variable interest rates.
The components of variable interest rates
The calculation is simpler than you might expect:
Interest Rate = Fixed Margin + Variable Base Rate.
Fixed margin is the lender’s calculation of your creditworthiness. Usually, the better your credit profile, the lower your fixed margin. And, it’s “fixed” in that it doesn’t change over the life of your loan. It’s only the variable base rate which changes over the duration of the loan.
Base rates can be derived from a government’s central bank, federal reserve, or a consortium of private banks. Examples of base rates include MCLR (India), SELIC (Brazil), Prime (US), LIBOR (US/UK), and Euribor (EU).
Unpredictability of variable base rates can be stressful. To reduce the emotional cost, ask your lender which base rate they use. Remember, you’ll live with this loan for a few years, and the up-and-down cycling of any base rate is to be expected.
How does interest accrue?
Compound versus simple:
Compound interest adds accrued interest to the outstanding principal and will accrue interest on that new amount in each subsequent month. This compounding effect leads to higher costs than simple interest, where interest is only charged on a fixed principle.
Full principal versus split disbursement:
Check when the the principal is disbursed to you or your university. Many banks require that you receive the entire principal at once, increasing the time that interest accrues on that principal. However some lenders will split your disbursement into tranches so you only receive the needed amounts at the necessary time, usually by semester or quarter.
What about fees related to abroad education loan?
While the interest rate is important, it’s deceiving to compare loans based on interest rate alone. Fees are just as important.
Every lender will charge at least one fee, and lender charge fees differently:
- A single administrative fee
- Smaller fees charged for different aspects of loan management
Examples of smaller fees include (but aren’t limited to) sanction, assessment, and disbursement fees as well as insurance. These smaller fees are sometimes paid up-front, before you pay your deposit, travel to campus, and receive your funds.
Why are fees important while choosing an education loan?
While a loan offer may seem affordable at first, fees could end up making the loan more expensive than anticipated.
Don’t forget about university payments when looking at fees; there may be hidden costs here, and you’ll need the answers to these questions:
- Is the tuition currency different from that of the loan?
- Will you need to convert money for tuition and living expenses?
- Will there be late fees if you receive and transfer the tuition fees late?
Keep in mind that Prodigy Finance disburses loans directly to the university in their currency which mitigates financial cost, as well as the emotional stress of paying your university from an Indian bank account.
Repaying your education loan
Where do you see yourself in five years? If you’re unsure, it’s important to give yourself the most flexible repayment scenario possible.
Nearly every lender allows for early repayment without fees or penalties. But there are plenty of other differences to consider:
- Are payments of interest obligatory during your studies?
- Can you repay from anywhere in the world?
- What is the maximum time you can take to repay the loan fully?
The answers to these question may change the total cost of your loan, and you’ll need to be clear on each - especially if you’re not certain what you’ll be doing post-graduation or where you’ll be doing it.
What about tax benefits on interest paid?
Some local lenders allow a student’s family to claim tax benefits on the repaid interest.
Tax benefits are only applicable on interest paid, not the total loan amount. This may decrease the cost of a loan for one borrower but not another. Depending on your family’s income, there may be a maximum benefit limit.
If you’re unsure how your family can claim tax benefits, speak with a qualified tax advisor.
The true cost of your loan is unique
What does cost really mean?
There are two types of cost:
- Financial cost is actual money out of your pocket over a period of time.
- Emotional cost is defined as your time and effort involved in the loan process, and any resulting anxiety.
The true cost of any education loan is calculated differently for everyone; the calculation depends on your comfort level of the financial and emotional risk.
Every student’s circumstance is different, and you may decide to prioritise one cost over another. But with an understanding of the key components of your loan and your priorities, you can work out the true cost of your education loan options - and choose the best offer for you.
Need an international student loan?
Prodigy Finance provides education loans to qualified international grad students pursuing their masters at top universities across the globe. No co-signer or collateral is required and it only takes 30 minutes to apply.
This article is a part of Prodigy Finance's FinLit series of webinars and blog articles. Read the rest of the articles here:
- Prodigy Finance Answers your Top 10 Education-Loan Questions
- Education loan 101: Understanding International Loan Terms
- What's Annual Percentage Rate for Education Loan & 9 other FAQs
- True cost of an Education Loan
- The 7 stages of your International education loan
- Applying for MS? Understand your education loan options...before you even apply to your school
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