Effect of Repo Rate Hike on Education loan Interest Rate

Recently, the Monetary Policy Committee has surged the Repo rate by 50 basis points, it has now become 6.50% from its past value of 4.0%. Raising the overall number by 225 basis points between May 2022 and February 2023.

As we all know that banks are the lenders. All the money that circulates in the market comes from the banks. But the parent lender to all these lenders is the Reserve Bank of  India, which is also called “The bank of all banks”. The Reserve bank of India holds the sole responsibility to form and regulate the policies that decide the functioning of all public and private banks in India. It drafts its policies considering the present and future financial requirements of the Indian Economy. This Repo Rate hike is one such strategy that the RBI implements to curb inflation. 

A six-member monetary policy committee (MPC), headed by the governor of RBI, is responsible to revise and propose a repo rate every two months. The main aim of the monetary policy committee is to keep the inflation rate at 5.7%. To know more about the recent repo rate hike, watch our full cover story about the impact of a repo rate hike on education loan interest rates:

Now the questions are: What is the Repo rate? Why has it increased? Will the education loan EMIs also increase from now? How can a hike in the repo rate control inflation?

In this article, we will tell you about the effect of the recent Repo rate increase on education loans. Also, we will tell you about the best ways to get a cheap education loan.

The Repo rate can be defined as the rate of interest charged by the Reserve Bank of India for lending money to commercial banks. Here the word REPO stands for Repurchasing Opting or Repurchase Agreement. Commercial banks sell their eligible securities to the RBI, in exchange to take a loan from RBI with an agreement to repurchase this security later.

RBI Charges an interest rate on the money lent and this rate of interest is called the repo rate. The banks then push out this money to fuse into the Indian economy via lending out home loans, education loans, etc. 

You must be wondering how the repo rate hike affects education loan interest. Let's find out.

The education loan interest rate for each bank is different, as it varies according to the bank's policies. The final interest rate for an education loan depends upon three components -

Repo Rate - Imposed by the RBI on all types of banks, for lending out money via education loans. 
Spread - Decided by the banks as per their policies, the value can be different for different products for the same bank.
Premium - Only some banks charge this standard premium or risk premium for the borrowed education loan  
The final rate of interest charged by any bank in India for an education loan will depend on the values of the above three components. So, the repo rate alone does not affect the education loan interest rate directly, but its hike will eventually increase the rate of interest for education loans.

The effect of a repo rate hike on the life of students is inevitable in terms of the increase in the overall interest on education loans. As mentioned earlier, the repo rate is the rate of interest that is charged by RBI for funds lent to commercial banks. When the repo rate increases, the cost of borrowing for the banks is increased, which will be passed to their account holders, and therefore the interest rate on education loans and deposit rates will also be increased.

Commercial banks will increase their lending rates to cope with the hike in the repo rate. Thus now, when students borrow money from commercial banks as education loans, the effective interest rate will be higher and they will have to pay a higher interest amount for the loan that they borrow.

In India, amidst the ongoing inflation and economic crisis, accumulating enough funds to bear the cost of abroad education is still a milestone for many students and their families. Parents and students servicing education loans may have a tough time ahead as RBI had increased the repo rate thrice previously and now it is further increased by 0.5% in September 2022 for the fourth time in a row.

This surge will cause a hike in the rate of interest for education loans also, and the students who were planning to go abroad for higher studies by taking education loans will now have to take the hit of this hike. As the interest rate for education loans will be increased subsequently. 

Most of the banks and NBFCs have already increased their benchmark rates post the 0.4 percent hike by the RBI last month and now another rate hike can be expected. Already, the cost of education, both domestically and internationally, is rising. Now, even the cost of financing education is on the way up. The new education loan interest rates may increase by 1.25 percent to 1.5 percent or even higher, from their existing values, depending on the borrower's profile, lending institution, the course, and the institution where the course is being conducted. You can get in touch with the Financial Officers of WeMakeScholars and get your education loan profile analyzed to know the lowest interest rate that can be offered to you on your education loan according to your profile.

As per the study by NCES,  the cost of higher education, whether in India or overseas, has been rising, and education loans have become crucial for study-abroad aspirants. With the support of education loans, students feel handy to fulfill their dream of studying abroad. While there are many lenders ready to fund your education abroad, ranging from public banks, private banks, and NBFCs to fintech companies, it is crucial to find out which is the most suitable lender for your education loan.

Indian Lenders VS Foreign lenders -
Indian lenders are Public and Private banks in India that fund Indian students to pursue their studies abroad while foreign lenders are those foreign institutions that offer funds to international students to come and study in their country. Here the catch is that in the case of foreign lenders, you will have to repay the education loan in the same currency, in which you have borrowed from them, say suppose the dollar. But, since the price of dollars is shooting up compared to the rupee. You will have to repay more money as interest if you take an education loan from foreign lenders in the USA. Therefore, we suggest students take an education loan from Indian lenders only. We are partnered with 14+ public and private banks in India and can connect you directly to them after you fill out and submit your loan eligibility form.

The interest rate offered by various lenders -
If you take a collateralized education loan from a public bank then the average interest rate starts at around 9.0 percent, while, in a private bank, the interest rate starts from around 12 percent. So clearly public banks are a good option when you have collateral to pledge, but when you do not have collateral and loan processing time is your deciding factor then you must process your loan with WeMakeScholars and get the best deal at the lowest rate of interest at the earliest. 

Lender’s expectation in exchange for the loan -
As mentioned earlier there are two options to get a secured loan that is, immovable property or liquid security, the type of security you pledge for a collateralized loan also plays an important role as their methods of valuation are different and that could alter your decision. So lenders' expectations about collateral should also be considered before choosing an education loan.

Overall, the impact of the RBI repo rate hike on students is going to be significant. Though conventional wisdom pushes for a collateralized education loan the modern ways of lending have allowed the student to free their parents, family, or friends from the stress of obligation and take on the loan themselves without collateral or a cosigner - purely based on their academic potential, this is an important variable that the student should consider as part of their search for a reliable loan provide amidst the recent repo rate hike. 

Undoubtedly, this repo rate hike by the RBI is like an attack, which is launched to counter inflation but its impact will not only be restricted to regulating the flow of money in the Indian market but will also put a dent in the common man’s pocket. But, you can take advantage of this article to find the best education loan for yourselves. This will help you to even earn and manage your finances while studying abroad.

Still worried about managing funds for your education abroad? We have got you covered. The process of applying for an education loan is already simple and it gets simpler when you process your loan with WeMakeScholars. We are here to help! Simply request a callback on our website, and one of our expert loan officers will revert to you at the earliest.