The hidden costs of an international student loan
When it comes to studying in the US, taking a loan is the most practical way to fund your education.
And it is common knowledge that borrowing from your home country costs a lot more than borrowing in the US. Have you ever wondered just how much more expensive that could be?
When you borrow from your home country, there are three main, somewhat hidden, costs that you need to take into account in addition to the interest rate that you have to pay. These costs make your loan significantly more expensive than the interest rate.
CURRENCY FLUCTUATION RISK
This is a cost that you would incur when your local currency moves against USD. When you take a loan in your home country, it will normally be in the local currency and you have to convert it to USD. The exchange rate is generally decided when your loan is approved, but it can then vary over time and eat into your total loan amount. You may even fall short of the total fees because of currency fluctuation risk.
This happened to thousands of students from South Africa when their savings decreased by 40% over 2014–2015 because of currency crisis. Indians also lost more than 40% of their loan amount to stronger USD over 2010–2013. Some students had to leave their program midway and go back home because they couldn’t pay the required fees. All the money for previous semesters was essentially wasted and they had a loan to pay off without the degree or better job prospects.
To illustrate the impact on your loan, here is an example:
Let’s say you have a loan approved from your home country:
Loan Amount (in USD): $10,000
Exchange rate: 63.98 (at the time of approval — Aug 3, 2015)
Effective Amount Borrowed: INR 639,800
Interest Rate: 13.0%
Loan Term: 24 months
Exchange rate: 66.76 (at the time of withdrawal — Aug 3, 2016)
You will receive only $9,584 because your loan was approved for $10,000 — that’s a loss of $416 (INR 26,600). You have bear this loss as bank made the loan in INR and doesn’t care about the exchange rate.
You lost $416 because of currency fluctuation before you could even use the money. This increases your effective interest rate to 16.63%.
CURRENCY CONVERSION FEE
This is the cost charged by the bank or money changer when you convert your home currency to USD. Our research shows that some places charge as high as 2.5% on currency conversion fee. However, there are some vendors/banks who charge ~1%.
Let’s continue the example above:
You are charged currency conversion fee twice. Once when you convert from INR to USD to pay the tuition and USD to INR when you repay the loan. Assuming that your bank charges a conservative 1% currency conversion fee and you are converting it on Aug 3, 2016 (tuition fee).
Loan Disbursal on Aug 3, 2016:
Loan Amount: INR 639,800
Currency conversion fee of 1%: INR6,398 ($96)
Loan Repayment at a later date:
Repayment Amount: $10,000 (principal) + $934.90 (interest)
Currency conversion fee of 1%: $109.34
Total Cost of Currency Conversion Fees:
Cost during disbursal + Cost during repayment = $205.34 ($96 + $109.34)
This additional $205.34 because of currency conversion fee adds up. The new effective interest rate with currency fluctuation risk and conversion fee increases to 18.49%.
Depending on the service you use, there is an additional fee every time you transfer money. Generally, companies like Xoom, Transferwise give the most competitive rates. However, they have a cap on the transfer amount each day and are limited by the countries of operation. Therefore, you may still need to rely on international wire transfers through banks to send the money. Most banks would charge a fee (around $35–40) for outgoing transfer while US banks generally impose fees on incoming wire transfers (around $15).
Continuing from the previous example:
Assuming you are transferring the loan to the US on Aug 3, 2016, the total wire fee would be $50.
With the remittance fee also eating into your loan, you will now only receive $9,438 from your original $10,000 loan.
The new effective interest rate, after taking into account the currency fluctuation, currency conversion fee and remittance fee, is 18.93%.
With all these ‘hidden’ costs, taking a loan from your home country makes it very expensive. While some students understand this, most are not financially sophisticated.
It has traditionally been difficult for international students without credit history to take a loan in the US. It requires a lot of paperwork and getting a cosigner may prove to be challenging. Moreover, it normally takes weeks before your loan gets approved.
Unlike banks and traditional financial institutions, STILT does not require co-signer and we do not charge any hidden fees — what you see is what you get. No Social Security Number (SSN) or Credit Score is required. And you can get your loan as quickly as two business days upon the completion of your loan application.