Loan to Study Abroad: Impact of Fluctuating Foreign Exchange Rates

Planning to study abroad is an exciting journey filled with dreams of global education, cultural experiences, and professional opportunities. However, financing this educational journey often involves one of the best solutions which is taking an overseas education loan. One crucial factor that many students overlook is the impact of fluctuating foreign exchange rates on their study loan for abroad.

Understanding how currency changes can affect your loan repayment is key to making informed financial decisions. So, if you are intrigued to know how fluctuating foreign exchange rates impact your overseas education loan, you are at the right place. This article will cover everything from tip to toe, so let us get started.

What are Foreign Exchange Rates?

Foreign exchange rates indicate the value of one country’s currency compared to another. These rates are crucial for students pursuing education abroad, especially when dealing with loans in a different currency. For example, if your loan is sanctioned in Indian Rupees (INR) but your expenses are in US Dollars (USD) while studying in the United States, you must convert INR to USD to cover tuition fees and living costs.

For students, these variations affect overseas education loan repayments and overall expenses, making it vital to understand and monitor exchange rates. A weaker home currency means paying more for the same amount of foreign currency, while a stronger currency reduces costs. But why does the currency fluctuate, let us find out ahead.

Why do Exchange Rates Fluctuate?

There are several factors cause currency values to rise or fall, we have listed some of the popular ones below.

• Economic Stability: Countries with stable economies usually have stronger currencies.
• Interest Rates: Higher interest rates attract foreign capital, increasing the currency's value.
• Inflation Rates: Lower inflation generally strengthens a currency.
• Political Events: Elections, government policies, and geopolitical tensions impact currency stability.

Understanding these factors helps in predicting potential changes that could affect your education loan to study abroad. So, let us first look at its impact.

How do Fluctuating Rates affect Education Loan to Study Abroad?

When you take a study loan for abroad in your home currency but spend in a foreign currency, you are exposed to exchange rate risk. Even small fluctuations can significantly alter the total amount you repay. Let us explore the various ways this happens.

• Increased Repayment Amount - When your home currency weakens against the foreign currency, you will need more money to repay the same amount, let us take a look at an example to illustrate this more clearly. Consider you are an Indian student studying in Australia. You took a loan of INR 15,00,000 at a time when 1 Australian Dollar (AUD) equalled INR 50. By the time you graduated, the exchange rate had risen to INR 55 per AUD. Your tuition fee of AUD 30,000, which was equivalent to INR 15,00,000 initially, now requires INR 16,50,000 to repay. Similarly, students from countries like Nigeria, South Africa, and Brazil, where currencies are more unstable, often face larger fluctuations, amplifying the importance of exchange rate awareness.

• Interest Rate Complications - Overseas education loans often have variable interest rates. If exchange rates fluctuate while your loan also carries a variable rate, the combined effect can be unpredictable. Rising exchange rates alongside an increase in interest rates can exponentially raise your repayment amount.
• Effect on Partial Payments and Prepayments - If you plan to make partial or full prepayments, the currency exchange rate at that time will determine how much your prepayment reduces the outstanding amount. An unfavourable rate can lessen the impact of prepayments.
• Impact on Living Expenses - Apart from tuition fees, students also incur living expenses in foreign currencies. A rising exchange rate increases daily living costs, affecting your overall budget. For instance, if your monthly expenses in the U.K. amount to 1,000 GBP, any upward shift in the exchange rate will require you to pay more in your home currency. Now that we have glanced at the impacts of currency fluctuations, let us shift our focus towards the strategies to ease it.

Strategies to Mitigate Currency Fluctuation Risks

• Opt for a Foreign Currency Loan - Some banks and financial institutions offer education loan to study abroad directly in the currency of the country where you plan to study. This removes exchange rate fluctuations from your concerns, as repayments will be made in the same currency.
• Use Forward Contracts or Hedging - Currency hedging tools like forward contracts allow you to lock in an exchange rate for future transactions. While not commonly offered to individuals, some specialized financial services can help students manage currency risks.
• Maintain a Currency Buffer - Having an additional amount set aside for currency fluctuation can cushion the impact of unfavourable exchange rates. Experts recommend keeping at least 5% to 10% more than your projected expenses.
• Monitor and Time Currency Exchanges - Using forex trading apps or services that provide real-time exchange rate alerts can help you exchange currency at favorable rates. Timing your currency conversion wisely can save a significant amount over the education loan to study abroad tenure.
• Consider Overseas Education Loan Providers with Favorable Terms - Some non-banking financial companies (NBFCs) and banks provide better terms for students, including lower interest rates and flexible repayment options, minimizing the impact of currency fluctuations.
• Balance Payments Strategically - For students earning part-time income abroad, using local earnings to manage expenses and partial study abroad loan payments can reduce dependence on exchange rates.
• Choosing the Right Overseas Education Loan

When selecting an education loan to study abroad, consider these factors to minimize risks.

• Loan Currency: Choose between a domestic or foreign currency overseas education loan based on your repayment preferences.
• Interest Rate Type: Understand whether the study abroad loan offers a fixed or floating interest rate.
• Repayment Period: A longer repayment period exposes you to more exchange rate changes.
• Overseas Education Loan Terms: Look for clauses that provide flexibility in case of financial difficulties.

In a Nutshell

The dream of studying abroad comes with financial challenges, and currency fluctuations are a significant factor to consider when taking a study loan. By understanding the risks and employing smart strategies, you can manage these challenges effectively. Proper financial planning and choosing the right overseas education loan terms will help you focus on your studies without worrying about exchange rate impacts.

Additionally, considering factors like the UK, Canada, Australia, New Zealand or the US student loan interest rate and taking assistance from study abroad education loan advisors can help you make informed decisions, ensuring a smoother and more rewarding study-abroad experience.