In simple terms, inflation means the loss in the value of money and an increase in the value of goods over a period of time. A lot of students today are willing to study in the USA, UK or any other country by taking an education loan. A high rate of Inflation makes loans and borrowings more expensive as the interest rates especially in variable loans fluctuate with the rise in Inflation.
In the same way, inflation makes education loans costly thus making it difficult for students who want to take loans to study abroad. Most of the government banks including SBI provide education loans at a floating rate of interest. The interest on education loans is subject to be revised every quarter so there are chances that it may increase with the rising inflation. Let’s understand all the details about inflation and its effect on education loans.
Table of contents
Increased Debt
Inflation can lead to higher education costs, which will ultimately result in increasing demand for education loans. Students who rely on education loans to fund their study abroad journey may find themselves burdened with more significant debt upon graduation. This makes it difficult to manage the repayment of loans as it keeps fluctuating. It is suggested to seek financial advice for the entire loan process including repayment so that when you finish your studies you don’t have to face a financial crunch.
Interest Rates
Most of the education loans to study abroad come with a floating rate of interest i.e. it will be revised every quarter. This is one of the major concerns when it comes to Inflation and its effects on education loans. When inflation is high, central banks may increase interest rates to control it. This can lead to higher interest costs for borrowers, making loan repayment more challenging. Hence, it is suggested that while choosing your lender you should consider negotiating the interest rate properly so that fluctuations will not affect much.
Also Read: Planning to study in USA? Check here for some of the best Government Education Loans to Study in USA
Effect on Loan Repayment
When you are studying abroad in a foreign university cost of living is one of the primary factors that attract a lot of money. Inflation can affect the student’s ability to repay their loans after graduation. As the cost of living rises, students may face difficulties meeting both their basic needs and their loan obligations. Though you will get a one-year moratorium period after finishing your course to repay the loan it will surely affect your finances once you start repaying the loan at a higher interest rate. Always get financial advice to frame an efficient plan for education loan repayment.
Long-Term Impact on Loans
Inflation’s impact on education loans isn’t limited to the immediate post-graduation period. When you finish your study at a foreign university and get a job you start making further plans. Students have several important goals like buying a house, a dream car, marriage plans etc. A high inflation rate will make the loan costly thus making you pay more than the earlier existing amount. This will force you to delay your other goals as you are already paying a debt and your debt-to-income ratio is not decreasing.
How to Tackle Inflation and its Effect on Education Loans?
While inflation’s effects on education loans are challenging you can tackle all such issues with effective financial planning. Decide the loan amount and negotiate the interest rate properly considering the upcoming economic conditions. Always consult certified financial advisors who can guide you through the entire process of taking an education loan to study abroad and repay it efficiently. Check some of the major ways in which you can tackle the effect of inflation on education loans.
Financial Planning
Start planning for your education early. Look for options to get the best scholarship and grant opportunities to reduce reliance on loans. If you are taking a loan to study abroad then plan it properly and don’t miss out on any terms and conditions. If you are not satisfied with the terms of your lender then try some other best market players. This will provide you with multiple options to compare your education loan.
Budgeting
Preparing an effective and realistic budget for your study abroad journey is very important. From application fees to tuition fees to your accommodation costs, everything shall be properly planned. This will help You to decide the appropriate amount of loan. After finishing your studies start repaying the loan as early as possible. It’s not necessary to avail of the moratorium period because ultimately you’re going to repay the loan. Also, if you have got funds to foreclose the loan then it’s the best option.
Also Read: Early Repayment Charges on Education Loan
Loan Refinancing
Loan refinancing is a system where you take a new loan to clear the existing one. Usually, banks and financial institutions provide this option so that you can get a fresh loan with better interest rates and other benefits. If you are getting a new loan offer from your lender with better terms and conditions then you must choose that. It will save you money which you are paying against the existing education loan.
Loan Take Over
A loan takeover or Balance Transfer is part of the loan refinancing system. If you got an offer from another bank or financial institution with better terms and conditions and low interest rates then you should choose that. The latter will take over the loan by paying the remaining amount to the existing lender and you will now pay your EMIs to the new lender.
FAQs
Generally, the loans get costlier during inflation because the RBI increases the interest rates to combat the rising prices. Most of the education loans come with a floating interest rate which may increase during a rise in inflation.
As per the latest research, the education inflation rate is twice the general inflation rate. Education fees get double after every 6-7 years.
Yes. You can contact your lender for refinance or you can choose any other lender who is offering you better interest rates.
In order to control the inflation rate, the Reserve Bank of India (RBI) increases the repo rate due to which the banks increase the lending rate. In this way, the loan gets costlier due to the higher interest rate.
The best way to make the loan cheaper and reduce the interest rate is to transfer your loan to other bank which is offering low rate of interest.
Inflation’s effect on education loans is an ongoing challenge for students who are planning to study abroad. When you take an education loan with a floating rate of interest then at the time of repayment it might get high. This will increase your overall cost of getting the loan. With the right approach of financial planning, loan refinancing and by planning a realistic budget you can easily tackle the effect of inflation on education loans.
To know more about the inflation rates on education loans, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience. Follow our social media handles on Twitter, LinkedIn and Instagram.
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