Foreign Education Loan - Impact of Inflation and Measures by Banks

Every student, at some point, dreams of pursuing top-notch higher education abroad, and among all countries worldwide, only a select few make it to their bucket list. For those who are truly determined to take it to a higher level, even overcome the major hurdle that is funding. To achieve this, they often consider taking out loans or applying for scholarships, etc.

However, there is another factor that is beyond everyone’s control – Inflation. As we have seen with the Russia-Ukraine War and the COVID-19 Pandemic, global events play a significant role in driving inflation. These events impact world trade and, consequently, affect your foreign education loan. So, what exactly is inflation, how does it impact your overseas education loan, and what are banks doing to address this issue? Let us go ahead in this article to find out about Inflation.

What is Inflation?

Inflation is the gradual increase in prices for goods and services over time, reducing the purchasing power of money. When any global events occur, they disrupt world trade, driving inflation higher. This, in turn, impacts foreign education loans by increasing interest rates and the overall cost of borrowing. Banks who are aware of these challenges often introduce various measures to help students manage their loans better during inflationary periods.

Impact of Inflation on Foreign Education Loan

Inflation significantly impacts foreign education loans in several ways:

• Increased Debt: As the cost of living rises, students may need to borrow more to cover their expenses. This includes higher prices for housing, food, transportation, and other daily necessities. As a result, students might find themselves taking out larger loans to manage these additional costs, increasing their overall debt burden and financial stress.
• Interest Rates: Be it secured or unsecured education loan for abroad, inflation often leads to higher interest rates set by central banks to control the economy. Higher interest rates mean that the cost of borrowing increases, so students end up paying more over the life of their loans. This can make the total repayment amount significantly higher than initially planned, impacting their financial future.
• Effect on Loan Repayment: With higher interest rates, monthly payments become more expensive. For students on a tight budget, this can mean reallocating funds from other important areas or even struggling to meet payment deadlines. The increased financial pressure can lead to defaults or the need for extended repayment plans, which can affect their credit scores.
• Long-term Impact on Loans: Over time, the cumulative effect of higher interest rates and increased borrowing can make it much harder for graduates to pay off their debt. The prolonged repayment period means more interest accrues, making the loan costlier. This long-term debt can delay major life milestones, such as buying a house, starting a business, or saving for retirement.
• Currency Fluctuations: Inflation can affect exchange rates, causing significant fluctuations in currency values. If a student’s loan is in a different currency than their living expenses, unfavorable exchange rate changes can increase the amount they need to repay. For example, a weakening home currency means students will need to exchange more of their home currency to pay the same amount in the foreign currency.
• Cost of Education: As inflation rises, tuition fees and other education-related costs may also increase. Universities might raise fees to keep up with their own rising costs, including faculty salaries, maintenance, and new facilities. This means students may need to borrow more to cover these higher fees, further increasing their debt.

Example:

Imagine you take out a loan of ₹5,00,000 to study in Australia. Initially, the interest rate is 5%, and your monthly payment is ₹5,300. Due to inflation, the interest rate rises to 7%, increasing your monthly payments to ₹6,000. Over a 10-year repayment period, this change means you end up paying about ₹7,80,000 more in interest.

In this scenario, inflation has increased your debt, raised your interest rates, made monthly repayments more challenging, and extended the overall repayment period. The combined effect is a significant financial burden that impacts your ability to pay off your loan and achieve financial stability.

Bank Measures to Counter Student Loan Inflation

To combat the effects of inflation on student loans, banks, and financial institutions have implemented several initiatives. These measures are designed to help students manage rising costs and ensure their education funding remains affordable despite economic fluctuations.

• Loan Refinancing: This is a common strategy where banks allow borrowers to replace their existing loan with a new one that has a lower interest rate or better terms. Refinancing can help reduce monthly payments and the total interest paid over the life of the loan. For example, if a borrower initially took out a loan at a higher interest rate, they could refinance when rates drop, potentially saving a significant amount of money over time.
• Interest Rate Discounts: Some banks offer interest rate discounts for certain conditions, such as automatic payments, on-time payments over a certain period, or having an account with the bank. These discounts can help lower the overall cost of the loan even as inflation pushes interest rates higher.
• Fixed Interest Rate Loans: To protect borrowers from fluctuating interest rates due to inflation, many banks offer fixed-rate loans. These loans maintain the same interest rate throughout the repayment period, providing stability and predictability in loan payments. Fixed-rate loans can be particularly beneficial during periods of high inflation when variable rates might spike.
• Income-Driven Repayment (IDR) Plans: Banks and financial institutions often promote or offer IDR plans, which adjust the monthly loan payments based on the borrower’s income and family size. This can make managing payments more feasible during times of economic stress or inflation, as the payments are aligned with the borrower’s earning capacity.
• Budgeting Assistance and Financial Planning: Financial institutions frequently provide resources for budgeting and financial planning. They help students create realistic budgets that account for inflation and rising costs of living. Additionally, banks may offer financial advisory services to help borrowers understand their loan terms and repayment options, ensuring they make informed decisions about their education loans.
• Grace Periods and Deferment Options: Some banks provide grace periods or deferment options, allowing students to delay payments until after graduation or until they have a stable income. These options can be crucial during periods of high inflation when students might be struggling to cover living expenses along with loan payments.

In conclusion, when it comes to financing your education, you could go with an NBFC education loan or could opt for a bank loan from either a private or nationalized bank. But keep in mind that these are just strategies from different financial institutions. As an aspiring student, you too should have your own set of tools. Think ahead about inflation, consider working part-time, and maybe even look into making early loan payments.

For better understanding, it is never a bad idea to meet a financial advisor. They are the ones who think way ahead and can help set you up for success in a foreign land.