Dollar-Denominated Education Loan For Indian Students: Any Good?

Students find themselves caught in the crosshairs of this financial misinformation, right at the time when they can most ill-afford it.

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Welcome to the times of ineffective and risky financial advice that leads to loan debts. Expenses becomes the second largest portion/slice of household debts. And students are the most vulnerable to this misinformation.

Students find themselves caught in the crosshairs of this financial misinformation, right at the time when they can most ill-afford it. The confounding question is: Do I get a loan in rupees or dollars? How good is a USD loan? How do I even decide?

Option #1: Loans in Indian rupees

Indian students can easily identify familiar and credible banking brands and engage with their local branches. Lakhs of students secure crores worth of student loans from the Indian market, every year.

Option #2: Loans in dollars

A few international lenders offer innovative products for student loans, particularly for those headed to coveted STEM and MBA universities.

INR loan versus dollar loan: The rupee-depreciation argument

The Indian rupee's decline against the dollar is real, and it might continue. Today, $1 is worth almost INR 80. A student who secures an equivalent of INR 50 lakhs loan in USD today, has to pay back a principal of $62,739.85. Now, if the USD itself grows 5 per cent stronger, then the rupee equivalent amount to be repaid also grows by 5 per cent. That's bad.

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Situations wherein Indian students might prefer USD-denominated loans

Students want independence: Enterprising Indian students want independence. They want a loan that doesn't involve their parents or their properties. And a few USD-denominated loans fulfill this need. These lenders offer no collateral, no cosigner loans.

Indian lending works very differently from USD lending. Indian banks insist on cosigners or collateral, particularly for those students who are not going to top-ranked programs or in case the loan amount is very high. So, a significant portion of the lending market ends up catering to students with resourceful parents.

Students want speed: Speed matters. To have your loan approval letter in hand, within three days of applying, is quite a delight. However, very few of the new-age lenders can help them secure education loans from US-based lenders within 3-5 days of applying.
This is the kind of service that the discerning student expects.

The big question is which Indian banks can contract their loan approval timeline to a week or less? Students will definitely prefer these banks over others. They want to save on currency conversion fees and forex charges.

For example, let's assume you land a $100,000 job after your MBA in the US. Every time you pay back your rupee-denominated loan, your debt doesn't reduce by the amount you paid back. That's because both the banks (paying and receiving) will extract a fee out of that money, for the currency conversion service. This could range from 1-2 per cent of the paid amount. Also, your USD will convert into a lower rupee amount, because the paying bank's conversion rate may be unfavorable compared to the going market rate. This could account for another 0.5 per cent.

Now, imagine being stung this way, every month. Normally, STEM and MBA students are capable of paying off their student debt in 3-5 years after graduation. That's 36-60 iterations of fees on your money. With a USD-denominated loan, a student doesn't have to be concerned about either the forex conversion fees, or the unfavorable conversion rate used by the bank.

Students want to avoid unplanned out-of-pocket expenditures: The standard foreign-education timeline (time from loan application to loan disbursement) is about 6-8 weeks. Let's assume that the rupee weakens by 1 per cent in this period. Now, that means that the money disbursed by the bank will be 1 per cent less than the USD equivalent amount you actually need. For a INR 75 lakh loan, this 1 per cent means INR 75,000. At this moment, students are cash-strapped, because they are literally juggling bombs with so many expenses: new laptops, flight tickets, and whatnot. Students simply don't want one more problem to handle during this phase. That's understandable given they're headed to a whole new life, in a whole new country.

Within September 2021 (INR 1 = $0.136) and September 2022 (INR 1 = $0.125), the INR has depreciated by almost 10 per cent against the dollar.

Note: Students continue to battle unplanned expenses during their study-abroad journey, because of the same reason. The depreciating rupee leaves their bank-disbursed amounts insufficient to actually meet the tuition fees and living-cost bills.

A reminder: Be curious, be prudent, be skeptical

These are odd times. Everyone lives under the impression that they have all the world's info at their service. This 'perfect awareness' perception is—well—just that: a perception. A lot of what you read on the Internet is either outdated, badly expressed, or plain wrong. A lot of it is mere opinion masquerading as truth.

You'd see industry veterans distilling their sermons down to this: 'the dollar will continue to get stronger against the rupee, so don't owe your loan amount in dollar terms'. In isolation, this is correct. But barely anything makes complete sense when isolated and stripped of context.

As a student, be open to all options. While availing of a student loan, make informed decisions, backed by data. That's when you know how to fairly compare options and you can be certain of getting the best terms on your loan.