Most Indian students have traditional variable rate loans. These loans have rates that change with market interest rates, which are beyond the control of the student and the lender. With many major countries – including India, the United States and others – expected to raise interest rates this year (perhaps multiple times), current student rates could be very different from current rates. are required to pay after graduation.
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Fixed rate loans are inflation proof and have fixed (pre-determined) interest rates for the life of the loan. These loans have a constant EMI (monthly installment) and students can rest assured that their payments will never increase over time, no matter what happens with market interest rates.
Fixed rate loans offer several advantages, the main one being predictability. Since the interest rate is fixed and does not fluctuate, EMIs are constant and students can plan their expenses in advance.
While this may not matter for short-term loans, the effect can be substantial for longer-term loans, such as those used to pursue studies abroad. They therefore provide long-term security by protecting students against potentially large EMI payments due to interest rate hikes.
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Refinancing a loan involves taking out a new loan to pay off an existing loan, often to obtain better interest rates, lower payments and/or better terms. In the current rate environment, graduates may be able to refinance their existing loans at lower rates that are also fixed, while freeing their parents from having to be co-signers or guarantors.
There are few certainties in life. Who could have predicted how COVID-19 would shape our world? But one certainty is that as the world emerges from the pandemic, central banks from Bombay to
are expected to raise interest rates, which means variable rate borrowers will soon face higher EMIs.
New graduates should be aware of these risks and consider refinancing with a fixed rate loan.
In the past month alone, the Reserve Bank of India has raised its key rate and is considering further increases. Meanwhile, the US Federal Reserve made the biggest interest rate hike in more than 20 years and hinted that further increases are expected. The only question is how far higher interest rates and resulting EMIs will go.
In 2008, rising interest rates and EMIs led many American homeowners to struggle to pay their mortgages, causing them significant financial hardship. The current rising rate environment, while unlikely to be as severe, should nonetheless caution students against resorting to variable rate loans when fixed rate options are available.
Fortunately, graduates working in the United States have fixed rate refinancing options. Graduates who refinance with a fixed-rate loan can not only enjoy a reduced rate and stabilized payments, but also potentially benefit from U.S. income taxes and employer-matched benefits.
Studying abroad is a complicated journey with many different factors to consider, from which school is best to how to pay. But in 2022, the decision of graduates to refinance with a fixed-rate loan is an easy, safe and no-regrets decision. As a recent graduate, it’s best to focus on your new career in the United States and not worry about what rising interest rates mean for your EMI.
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The author is Associate Director of Corporate Strategy at MPOWER Financement