Guide on how to evaluate loans for MBA abroad

MBA abroad is an expensive affair and deciding how to fund it is an integral part of the whole process. Not gonna lie, it’s a complex and time-consuming procedure to decide what options are the best suited for you.

Well, you only need to get into this lending discussion if you do not have a full-ride-scholarship / trust fund / generational wealth / crazy personal savings. If you have any of the above, you’re very privileged, unlike me, and you can stay away from this content.

Here is a decision tree you can use to do a quick analysis of what your top choices of loan should be. This is strictly based on getting the best interest rate, a few familial considerations also come into the picture — I’ll cover them below. Also, this is strictly in context to education in the USA.

Step 1: Do you have a relative who can be a co-applicant for your loan?

Yes: This can be the best interest rate route that you can take for your education financing. You can get interest as low as 5%, the only condition is any relative / family friend of yours needs to agree to co-sign your loan from a US bank. This can be tricky considering two things:

1. Family might not want to take a favor from a relative / family friend and bring that equation into their relationship. This was the case with me. Co-signing essentially makes the person your guarantor, which is a huge obligation for anybody.
2. Co-signer’s current credit profile and future needs: US credit systems are strict and since the economy is heavily credit-driven, people tend to take out credits for a lot of stuff. Having a huge education loan attached to their profile can hamper their ability to take out future loans. So if your potential co-signer will need a home/car loan in the future — it’s probably not a good idea for them to co-sign your loan.

No: Move to Step 2

Step 2: Does your university provide loans at a subsidized rate?

Yes: This is a great option for students without US co-signers since it does not require any collateral and no hassle of transferring funds from the lender to the institution — they’re the same. The university has a sense of trust in its legacy and by extension its students — which makes these lending programs lucrative for the students.

However, you should compare the interest rates with other options to make sure you get the best deal. An Indian loan with collateral is probably the best competitor with this option. Take a quote from both and compare — how to compare is covered below.

No: Go to Step 3

Step 3: Do you have collateral to provide for an Indian loan?

Yes: Generally you get better rates if your collateral covers the full value of your loan. Collateral can be either a property or FD (fixed deposit). In the case of a property, the lender will evaluate the value of the property as per market standards and provide the quote of the maximum allowed loan amount based on the evaluation.

Here too, see if your parents are comfortable doing it. Although the collateral is not going anywhere, it can be an emotional decision for a family, and see if your family is ok putting the collateral. This is the option I took.

No: Evaluate interest rates from Indian lenders without collateral. These will be higher than the collateral loans or US loans but there are a few benefits of an Indian loan that you should consider:

1. Impact of income tax benefits: Under Section 80E, your parents can avail of tax benefits for your education loan, and this benefit is not capped. This can reduce your effective interest rate. For example:
   Your loan: 1Cr
   Interest Rate: 10%
   Interest payment for 1 year: 10L
   If your parents come under the 30% tax slab, they can reduce their taxable income by 10L, saving 3.3L in taxes.
   Tax savings: 3.3L
   Effective interest rate: (10–3.3)/100 = 6.7%
2. Impact of INR depreciation: As INR has historically depreciated against USD, we can safely assume that this phenomenon will continue — unless you’re very unlucky or India starts progressing exceptionally. So if you take out a loan in INR today and pay it back in USD in the future, you’re likely to benefit from the INR depreciation. Here’s how:
   Your loan in INR: 1 Cr
   Exchange rate when repayment starts: 83
   Monthly installment post moratorium period: 1L per month (~$1208 )
   INR depreciates 2% every year (assumption), exchange rate is now 84.6
   Monthly installment 1 year post repayment starts: $1182
   Monthly installment 2 years post repayment starts: $1158

Take all of the above factors into account when you’re assessing your Indian loans — the amount you can save on ITR can vary and depends on how much interest your parents are giving right now.

Step 4: Is your max required amount > max loan provided without collateral by Indian lenders?

In case your required amount exceeds what Indian lenders can provide without collateral — time to turn to international lenders like Prodigy, Earnest, MPower, etc.
These lenders do not require collateral but have the highest interest rates among all the options that we evaluated.

If you’ve secured an admit to a top US university, you will find ways to finance it, without a doubt — it’s all about finding the most economical way to do that. And that is what this guide is about.

Now that we’ve covered which loan you should go ahead with, there are a few more nuances that you need to consider and possibly negotiate with your lender on:

1. Moratorium period: This is the period where you do not make any repayments for the loan- this is when you are studying at the university + X months. You need to make sure this X is suited to your requirements. It’s generally 1 year but some lenders provide 9 months, make sure you know this and negotiate accordingly. For the moratorium period, the interest accrued is simple interest, post that the compounding starts.
2. Compounding period: How is your loan compounding, is it per day, per month, or per year? Every lender has a different structure and you need to make sure you are aware of it. This can impact the effective interest that you give. For example: Per day compounding increases your effective interest rate by 0.6% than compounded annually. You know the maths, do it !
3. Prepayment charges: Students generally want to close their debts soon and prepayment of education loans is how you can do it. So make sure you’re not giving any charges for paying your loan early, this should be baked into your loan agreement.

These are the major things you need to take into account while finalizing your loan with the lender. It’s a long and daunting process but it’s worth it, you can save a lot of money by a few of these efforts early on.