Top Factors to Consider for Indian Families when Applying for an Education Loan to Study Abroad

Studying abroad is an exciting opportunity for students to advance their skills and grab better work opportunities.

But the biggest roadblock for most Indian students isn’t the application process or visa approval, it’s figuring out how to afford it all. The tuition fees, accommodation, cost of travel, and daily expenses, all add up to a huge sum that scholarships and personal savings may not be able to cover.

Which makes education loans the most viable option. There are many education loans available today that can be secured easily without putting a lot of financial pressure on your family.

But before you jump in and apply for the first loan, it’s important to understand what you are signing up for. Proper financial planning and picking the right loan provider are necessary to secure the best loan for your higher studies.

Let’s break down the top factors you should look for before applying for an education loan.

Discuss Education loan plans with your Parents and Financial Advisors 

An education loan is a long-term monetary commitment. For most Indian undergraduate students, the parents and immediate family will be the sole sponsor in most cases and their loan eligibility will be crucial for securing the required amount. However, for Indian MS and MBA aspirants it’s important to keep your parents or guardians also involved in the decision-making process. They might be co-applicants for your loan, and their financial situation could impact your eligibility. 

Before leaping into this huge financial responsibility, applicants must have an open conversation about:

– How much financial support the family can provide through their savings

– Who will bear the responsibility of the loan repayments while the applicant is studying

–  The preferred loan type – secured with collateral or unsecured non-collateral loans

–  Should you start repaying interest while studying or opt for a full moratorium period.

These questions will make financial planning easier. If possible, consult a financial advisor to compare loan options and understand the best solution based on your program duration, chosen country, repayment ability, and future earnings.

Types of Education Loans

Education loans can be secured (collateral-based) or unsecured (non-collateral).

If you are applying for a collateral loan, you will need to pledge an asset such as property, fixed deposits, or insurance policies as security. These loans usually come with lower interest rates since lenders consider them lower risk. However, the approval process may take longer due to asset verification.

For non-collateral loans, no security is required. This makes the process faster and more accessible. These loans generally have higher interest rates, and lower loan amounts with strict approval requirements, like high academic record, loans for specific courses and select universities, and co-applicant’s financial requirements.

Shockingly, interest rates on education loans for different study destination countries can vary by as much as 3%, potentially costing families lakhs of rupees over the loan’s lifetime.

Choosing the Right Education Loan Provider

In India, students have the option to take loans from public sector banks, private banks, and Non-Banking Financial Companies (NBFCs).

Each loan provider has different features and benefits. While comparing loan providers, check aspects like interest rates, repayment terms, eligibility criteria, collateral requirements, and processing fees. These factors can make your decision easier and fetch the best education loan for your international studies.

Here’s a quick overview of different financial lenders:

Non-Banking Financial Companies (NBFCs)

NBFCs provide loans with flexible terms, eligibility criteria, and quick loan approval, but tend to have slightly higher processing fees and interest rates.

Private Sector Banks

Private banks offer higher loan amounts, flexible repayment terms and faster loan processing. Some banks also provide non-collateral options for bigger loan amounts but might charge higher interest rates and processing fees.

Public Sector Banks

Public sector banks offer many government loan schemes with lower interest rates and easy repayment solutions but may require collateral for higher amounts and apply strict criteria.

Grace period (moratorium period) before EMI repayment begins

Most education loans come with a moratorium period, meaning you don’t have to start repaying the loan immediately. This period usually covers the duration of your education program plus 6-12 months after graduation.

This gives students time to secure employment or figure out a repayment solution without worrying about it while studying.

Some banks allow you to pay only the interest during this period, while others might give a complete break from payments. It’s best to choose a lender with a flexible repayment option.

A recent study revealed that over 40% of Indian students abroad face unexpected financial shortfalls, despite securing education loans, highlighting the importance of comprehensive planning so that EMI repayments stay on track.

Eligibility criteria for an Education Loan

Banks and NBFCs in India have specific criteria for loan eligibility. You can check the official websites for exact details. However, most lenders follow these standard requirements:

Nationality- You must be an Indian citizen. Some lenders also provide loans for NRI students, but the terms may differ.

Confirmed admission- To avail of a loan, you require an acceptance letter from a recognized foreign university.

Academic qualifications- You need a strong academic record for loan approval. (minimum 50% marks)

Co-applicant requirement- Lenders also require a co-applicant (parent/guardian/guarantor) with a steady income, as they are responsible for repaying the loan if the student is unable to. The co-applicant’s credit score and financial stability are important factors in loan approval.  

Key Documents and Fees Involved for Getting your Education Loan Approval

To apply for an education loan with a bank or NBFC, you will need the following documents:

•   Loan application form
•   Acceptance letter from a foreign university
•   Academic records- 10th, 12th, and degree certificates
•   KYC documents that are authentic ID proof- Aadhar Card, Voter ID, PAN, Passport
•   Income proof of co-applicant (salary slips, ITR, bank statements)
•   Additional documents

The list of required documents and eligibility criteria may vary depending on the lender. Check the official website for more details.

Once you have gathered and submitted the required documents, the lender will review your application and verify the details before sanctioning the loan. This process typically involves assessing your academic background, the reputation of the university, and the financial stability of the co-applicant (if applicable). Some banks and NBFCs may also require a collateral evaluation if you are applying for a secured loan.

After approval, the lender will issue a sanction letter, which outlines the loan amount, interest rate, repayment terms, and disbursement schedule. At this stage, you may be required to pay sanction letter issuance fees, which can vary from lender to lender.

Once the loan is sanctioned, additional fees may apply, such as:

Processing Fees – Typically ranges from 0.5% to 2% of the loan amount.

Sanction Amount Fees – A nominal charge imposed by some lenders to confirm loan approval.

Foreign Exchange (FX) Charges – If your loan is disbursed in a foreign currency, banks may apply FX conversion charges and transaction fees, which can impact the final amount received by the university.

Legal & Valuation Fees – If collateral is required, banks may charge legal and property valuation fees.

Before proceeding with the disbursement, it’s crucial to check with the lender about all applicable charges to avoid any surprises. Additionally, some banks offer pre-visa disbursement, allowing students to show financial proof for visa approval.

Which is better: Taking a loan vs. self-funding?

One of the most important considerations for studying abroad is the financial aspect of education. Which is the right option for you—taking out a loan or funding it yourself?

For some students, self-funding is a wise choice to avoid liabilities, but for many, an education loan is the more suitable option. While self-funding can reduce debt and eliminate interest payments, it may drain your family’s savings without covering all costs.

On the other hand, education loans spread the cost over several years, help build a strong credit score, and offer tax benefits under Section 80E of the Income Tax Act. Under Section 80E, the interest paid on an education loan is fully deductible from taxable income for up to 8 consecutive years, starting from the year you begin repayment. Unlike other tax-saving options, there is no upper limit on the amount that can be claimed as a deduction, making it a significant financial advantage. However, note that the principal amount is not tax-deductible—only the interest component qualifies for this benefit.

If your family can comfortably fund your education without financial strain, self-funding may be a better option. However, if you prefer to preserve savings while benefiting from loan advantages like tax savings and flexible repayment plans, a well-structured education loan can be a smart financial decision.

Final thoughts

Applying for the best education loan for your foreign studies involves considering several factors, like choosing the right financial provider, understanding repayment obligations, and planning for the future.

The right loan can ease financial stress, and let you focus on what truly matters- your education and career.

To make this decision easier for students, ApplyBuds has partnered with top loan providers in India to help you find the best and secure financing options. Check out all the education loan options on our portal and take the next step towards your foreign education.