Is a ₹25 lakh loan for studying abroad a good idea?

Taking a 25 lakh education loan to study abroad is a significant financial decision, and it's important to plan carefully to ensure you're making the right choices both for your education and your long-term financial health. Here’s some tailored financial advice for a 22-year-old student considering an education loan:

1. Assess the Need for the Loan

• Determine the total cost: Ensure that you’re borrowing only what you truly need. Break down the total amount required for tuition, living expenses, insurance, travel, books, and miscellaneous costs.

• Explore Scholarships and Grants: Look for scholarships, grants, or work-study opportunities that could reduce the loan amount. Scholarships, even small ones, can ease your financial burden significantly.

2. Understand the Loan Terms

• Interest Rate: Check the interest rate on the loan, as this will significantly affect the total amount you’ll repay. Indian banks typically offer education loans at around 8-12% interest for higher studies abroad.

• Repayment Terms: Make sure to understand the repayment schedule, which may include a moratorium period (usually the duration of your course + 6 months to 1 year). After that, payments will start, which could be a long-term commitment.

• Loan Processing Fees: Some banks charge a processing fee for education loans, which can add to the total cost of borrowing.

3. Loan Repayment Plan

• Calculate Monthly EMI After Graduation: Plan for how you will repay the loan after finishing your studies. Start estimating your post-graduation salary in the field you're entering and compare it with the EMI (Equated Monthly Installment) you’d need to pay.

• Use a Loan EMI Calculator: Use online tools to calculate the EMI. For a 25 lakh loan with 10% interest and a 10-year repayment period, the EMI can be substantial (around 30-35k INR monthly).

• Income Potential in Your Field: Research your potential earning capacity after graduation. If you’re going into fields with high earning potential (like tech, finance, or engineering), you’ll have more flexibility in managing the EMI. If your field has moderate earning potential, you may need to adjust your lifestyle or repayment expectations.

4. Start Saving for Repayments Early

• Build a Financial Cushion: If possible, start saving for the loan repayment even while you're studying. The more you can save before your loan repayment starts, the easier it will be to manage. Some students get part-time jobs or internships during their studies to earn and save.

• Part-Time Jobs/Internships: If you're eligible to work while studying (in countries like the US or UK), try to take part-time work that can help with living expenses, reducing your financial stress after graduation.

5. Minimize Living Expenses

• Budget Wisely: It's easy to overspend when living abroad. Make a strict budget to keep your expenses in check. Avoid luxuries or unnecessary spending, and focus on keeping costs low.

• Accommodation: Look for affordable housing options, like sharing apartments or living in student housing. Rent can be one of the largest expenses when studying abroad.

• Student Discounts: Take advantage of student discounts for transportation, food, and entertainment, which can add up over time.

6. Consider the Return on Investment (ROI)

• Evaluate the ROI of Your Education: Think about how the education and the degree you’re pursuing will impact your career trajectory. High-ROI degrees from top universities in fields like technology, business, and medicine often lead to high-paying jobs, making the debt easier to manage.

• Reputation of the Institution: Research the global ranking and reputation of the university and program you’re attending. The higher the reputation, the more likely you are to find a well-paying job post-graduation.

7. Explore Refinancing or Top-Up Loans

• Refinancing: After completing your studies, if you’re earning well, you might want to explore refinancing options for a better interest rate or terms.

• Top-Up Loans: If you’re struggling to manage living expenses, some banks may offer top-up loans on your existing education loan. However, this should be avoided if possible, as it will increase your overall debt.

8. Consider the Tax Implications

• Tax Benefits: In India, under Section 80E of the Income Tax Act, you can claim a tax deduction on the interest paid on an education loan for higher studies. This can help reduce your tax liability when you start repaying the loan.

• Work Location: After graduation, if you plan to work abroad, consider the tax system in that country. Some countries have favorable tax regimes for students who graduate and work there.

9. Plan for Currency Fluctuations

• If you’re studying in a country with a currency different from the INR (like USD, EUR, GBP), currency fluctuations could impact your overall loan burden. Plan for exchange rate risks, and consider converting some funds to your study country’s currency in advance if the exchange rate is favorable.

10. Emergency Fund and Contingency Planning

• Build an Emergency Fund: If possible, have a backup plan for unexpected financial emergencies, especially if something goes wrong during your studies. This could include health issues, a gap in income if you're unable to secure a job, or other unexpected expenses.

• Insurance: Make sure you have proper health insurance and travel insurance while abroad, as these are critical for managing risks like illness, accidents, or theft.

11. Post-Graduation Loan Management

• Once your loan repayment begins, ensure that you're able to start making payments as per the terms. If you have any issues, communicate with your bank and explore restructuring or other payment options if necessary. Avoid missing payments as it can negatively impact your credit score.

Final Thought:

A 25 lakh loan is a big commitment, but it can be manageable if you plan carefully. It's essential to balance your desire to study abroad with the financial realities of repaying a significant loan. Be disciplined with your budgeting, keep track of your finances, and focus on securing a strong post-graduation job that will allow you to comfortably manage the loan repayment while building your career.