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How falling rupee will impact your foreign education

The rupee touched 59 to a dollar last week and it sent panic waves among investors, bankers and the government. The investors' community is worried because it will cut down the returns of foreign institutional investors (FII), which will directly impact the stock market negatively. Bankers are worried because this has delayed RBI's rate cuts further. The government is worried because it will further increase the deficit.

But there is one section which is possibly impacted more than any of these communities. This community never comes into media or becomes a concern of economists. This community is that of students who are trying to secure loans and fund their education abroad. They are the ones who face the impact directly, unlike bankers, investors and the government.

The lure of foreign education
Foreign education is a dream of many students from India. The exposure to the wider world, intellectual surroundings, competitive environment, and meritocracy are the factors that drive our youngsters to American or European shores for higher education. However, there is the problem of funding.

In recent times, the government has directed banks to be more liberal in education loans and this has helped students. Even though the loan rates are still higher, there is a real chance of getting loans for education abroad. This is a major help.

Impact of depreciation of rupee
When students go for education in foreign countries (for example, the US), they pay fees and incur expenses in dollars. When the rupee goes down, the amount in rupees needed to pay in dollars is more. Hence, rupee depreciation adds to your funding requirement.

Let's look at it this way. The typical cost of studying in US universities is anywhere between $15,000 and $30,000 per year. This is just the fee. Add another $15,000 as living expenses. Hence, a student has to invest about $30,000-50,000 per year for higher education.

Now suppose a student plans to study at a US university and takes a loan from a bank. He estimates that he will need $40,000 for his entire education. Let's say, for example, that the exchange rate is Rs 50 per dollar. Hence, he applies for Rs 20 lakh as education loan. However, by the time he is about to pay the fee and go to the US, the exchange rate goes up to Rs 55 per dollar. This means the cost of education is up by 10 per cent. The student will now have to pay Rs 22 lakh. His expenses just went up by Rs 2 lakh.

Many parents fund their children's education from their savings. Any depreciation in the rupee adds to their woes as they have to dip further into their savings.

The only set of students who will gain from the rupee depreciation are those who have already completed their studies and are about to begin repaying their loan. For them, the depreciation of rupee means fewer dollars to be paid back to the bank.

Options to manage the fall
The first option should be to speak with the bank and ask for a further loan. Banks have introduced top-up schemes for education loans where they fill the gap created by the exchange rate fluctuation. Hence, in our example, the student can get a top-up of Rs 2 lakh from the same bank. This will certainly increase the payback amount but it will help students continue with their studies.

The other option is to wait and watch the RBI action on exchange rates. Typically, the RBI intervenes when the exchange rate goes closer to Rs 60 per dollar. This option is fraught with risk though. Every rupee slide has reasons behind it. Sometimes, the reasons are manageable and hence RBI takes action to restore the rupee at a certain level. Sometimes there are structural reasons for the slide. In such cases, even RBI may not have much say.

Conclusion
In the recent fall, there have been different voices from the market projecting opposite actions. Some say the rupee may touch 60 and go beyond. In fact, some experts have said that the fall may even touch 70 to the dollar as this seems to be the right exchange rate given the higher inflation India has been going through for last couple of quarters.

On the other hand, the RBI and the Finance Ministry have sounded optimistic that the fall can be arrested.

BankBazaar.com is an online loan marketplace.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.