Hidden Charges in Education Loans


Quality education in India and abroad is a costly affair, and abroad education is in high demand by Indian students. One of the main reasons behind their selection of abroad education is the high quality of the teaching-learning process.

Education in foreign countries is an expensive investment. However, to manage monetary expenses instead of liquidating family savings and personal assets, students have started to borrow education loans. Students who are in need of financial assistance can turn to foreign education loans to manage their financial requirements. Before signing the loan agreement, students are required to stay attentive to the charges mentioned in the loan agreement to avoid missing important details.

It's important to understand that abroad education loans can come with hidden fees and charges that are difficult to observe in the initial stages. These hidden charges will impact the overall cost of a foreign education loan and can lead to financial strain for the borrower. To give you a brief walkthrough of the hidden charges, we have enlisted the charges that are possibly charged by lenders, but in reality, these are only extra charges, and there is no legal provision for them. By understanding these charges, students can make informed decisions and avoid being trapped by paying any unwanted charges.

Hidden charges in education loans to study abroad:

  1. Processing Fees: 

Processing fees are well-known to every applicant. Students who are in the process of taking an education loan abroad must have paid the processing fees. This is among the administrative charges laid down by banks and authorised lenders depending upon their policy for education loans. The fee is taken from the borrower as a charge to process the loan application.

Any authorised education loan provider, like banks and NBFCs, is liberal in charging processing fees from the borrower. However, no other service charge can be charged by the lender along with processing fees. Processing fees range from 1% to 2% of the total loan amount. NBFCs and banks usually charge GST along with processing fees. It is advisable that before finalising the procedure for abroad education loans, students discuss processing fees with their loan provider.

  1. Prepayment Charges: 

Many students prefer to repay their debt in the shortest amount of time possible to reduce their loan burden in the long run. Some banks can charge prepayment penalties to borrowers who wish to end their abroad education loan before the scheduled time for repayment. The prepayment penalty can go up to 5%. However, as per the mandate released by the RBI, no bank can charge the prepayment penalty on borrowers if an individual is making the prepayment of their loan to end it soon. It is advised for the students to read the foreclosure details in the loan agreement carefully. Before pre-paying for the education loan abroad, always have a word with the lender.

  1. Late Payment Penalty: 

Banks can levy penalties on late payments of interest and EMI by the borrower. Borrowers are obliged to make the loan payments at the specified time. In case an individual fails to pay within time, they have to pay the penalty that will increase the cost of their loan. Not only will this late payment of loan dues have a negative impact on the applicant's CIBIL score, but, to avoid paying for late payments, applicants should try to make the EMI payments on time.

  1. Currency Conversion Charges

Banks can levy 1% to 2% as currency conversion charges from students if they request the bank or their loan provider to disburse part of their tuition fees directly into the account of the university. It is essential to clarify this with your loan provider if they have any provisions for charging for currency conversion. Let’s understand this with the help of an example: if you have taken a loan of 30 lakh INR and you need to pay the tuition fees to an Australian university, then your loan may apply a currency conversion rate to the loan amount that is released in the university’s account.

  1. Loan Insurance Charges: 

It varies from lender to lender. If you have taken the loan from a government bank, then they may have different provisions for charging the loan insurance fees. Government banks usually deal with cases of collateral education loans. They charge 0.5% to 1% of the entire loan amount as tuition fees. It’s not mandatory for the student to take out loan insurance if they are taking their loan from a government bank. While lenders like NBFCs and private sector banks have made it a compulsory provision that students have to purchase loan insurance, specifically if they are taking an unsecured education loan to study abroad,

  1. Moratorium Period Interest: 

A moratorium period typically lasts between 6 and 12 months. It is a period during which lenders grant students the flexibility to secure suitable employment before commencing repayment on their student loan to study abroad, especially those intended for studying abroad. Public sector banks generally offer this period without any immediate payment obligations, allowing students to focus on finding a job. Conversely, private sector banks or non-banking financial companies (NBFCs) may require borrowers to make either partial or full interest payments during this period.

  1. Disbursement Charges

Disbursement charges are levied when the lender is directly disbursing the loan amount in the university’s account or via a third-party agent like Flywire. For instance, if the remittance has been paid through an education loan, the borrower will get a concession of 0.5% on TCS (tax collected at source) for payments of more than 7 lacs INR. However, if the tuition fees have been paid through any other source except an education loan, it will exclude the concession, and then the TCS deduction will range up to 5%. Disbursement charges are subject to change and vary from lender to lender. Students can discuss the disbursement charges levied by their lender; it will help them make an informed decision accordingly.

  1. Loan cancellation charges: 

In case the student wants to cancel their education loan after disbursement, they will be given six months after disbursement. Students will be allowed to cancel their education loan after six months of disbursement, and they will have to return the total amount disbursed along with interest accrued in those six months. Different lenders have their own conditions to allow education loan cancellation abroad; this may vary before or after loan amount disbursement.

  1. Cheque or ECS swapping charges

If you want to switch your EMI payment from your previous account to any other account, you need to have a word with your lender. If they will allow you to do so, they can charge some fees to swap it.

  1. Bouncing of an EMI Payment

The borrower usually makes the payment either through a check or via an electronic clearance system. But if your payment gets bounced, you will have to pay the penalty. It's important to ensure that you have a sufficient balance in your account to avoid bounces.

Students are advised to read all the terms and conditions of the loan agreement carefully to avoid paying anything extra in the future.

If you still have any questions related to education loans abroad, you can contact Education Loan Guru.

By Education Loan Guru