PremiumThe repo rate was recently increased by 35 basis points in December by the Reserve Bank of India (RBI), the fifth such rise in 2022; it is at 6.25 per cent. Since the onset of April 2022, the RBI has increased rates by a total of 225 basis points (bps), which was done to combat record-high inflationary figures. The cost of borrowing for the banks rises when the repo rate climbs, which causes interest rates on different loan products, including education loans, as well as deposit rates, to climb. Since the majority of banks and NBFCs have raised their benchmark rates in response to the RBI's most recent rate hike, education loans became more expensive starting at a rate of over 8% to 16%. As a result, the impact of the RBI repo rate hike on students had already begun. Consequently, let's talk from our industry specialists about how students who wish to apply for an education loan should prepare for amid higher rates of banks.
Amit Singh, Founder, UniCreds said “2022 saw a number of internal and external trends that are expected to impact the student debt outlook over the coming years. Internationally, the demand for higher education spiked for various destinations like the UK, Germany, and Australia, thus increasing the need for financing. Domestically, the most significant change to the student loan context came from the repo rate hikes which began back in April, 2022. The RBI most recently increased the rate by 35 bps to 6.25% in December, following the 5.9% mark it established back in September. Furthermore, the RBI reported that the average 1-year marginal cost of funds-based lending rate (MCLR) for scheduled commercial banks increased from 7.65% in August, 2022 to 7.75% in September, 2022. Collectively, these represent a trend toward rising interest rates for the foreseeable future."
“While a rise in interest rates would be strenuous for students planning to finance their education both domestically and overseas, there are a number of ways in which they can handle this situation:
1) Given the current upward trend in interest rates, opting for a fixed rate of interest as compared to a floating rate is advisable to avoid future hikes in EMI
2) Applying for international study loans in the currency of the destination can significantly reduce the financial uncertainty caused by forex fluctuations, which can be an added cost to already high interest rates
3) Comparing rates of banks vs NBFCs and making an informed decision as per the timelines of loans and repayment options is advisable
4) A number of countries have made student work opportunities more accessible and lucrative to attract foreign talent. These can be leveraged for financial security overseas and paying back loans intermittently even before their education is completed. This can reduce the amount on which interest is calculated every month
5) Reduce the tenure of the loan as much as possible. Some borrowers take loans for a longer tenure only because of the lower EMIs it entails. However, doing so increases the total interest payable on the loan. If you foresee good prospects of a well-paying job after your course, it is better to opt for shorter loan tenure. Although this would mean slightly higher EMIs, your loan will be less expensive and you will be done with the repayment quicker. However, when making this decision, ensure that you strike a balance between your repayment capacity and the shorter tenure," Amit Singh said.
Mr Ankit Mehra, CEO and Co-founder of GyanDhan said “The students should check whether the interest rate being quoted is a fixed or a floating interest rate. While floating interest rate changes with market conditions such as repo rate changes, the fixed rate of interest does not undergo any change, and therefore, any increase or decrease in the rate does not impact the borrower. It is worth noting that education loans are typically offered at a floating rate. For students with floating rates, one needs to understand what is the benchmark rate and what is the frequency of change in the rate. Every bank can choose a benchmark and link its lending rates. A few established benchmark rates are Euribor, SOFR, or repo rate."
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.