Four Paths for Securing Loans

You’re reading an excerpt of Admitted by Soundarya Balasubramani. Written by an Ivy League graduate from India, this is the proven guide for students worldwide looking to pursue undergraduate or graduate study abroad in the U.S., Canada, or Europe. Purchase for instant access to the guide and other exclusive resources—including sample SOPs, sample resumes, scholarship lists, and a private community with other readers.

We said it before, and we’ll say it again.

Traditional banks are not the only source to secure a loan.

The educational loan market is a very lucrative one, and there are plenty of other players who offer competitive terms to get more customers. Your strategy should be to get a free quote from players across the market, compare the offerings, and pick the ones that suit your needs best. We will go into more detail on how to compare loan offerings later in this chapter. For now, let’s learn about the four kinds of entities.

Traditional Indian Banks

Let’s start with the one we all know about: traditional banks. There’s a good chance you can name at least five banks off the top of your head. Go ahead, try it.

Traditional banks can be subdivided into two broad categories: private sector and public sector. A public sector bank is one in which the government owns the majority of shares. In India, State Bank of India is a good example, where the government owns 58.6% of shares, as of July 2019.* A private sector bank, on the other hand, is one where most of the equity is owned by private bodies, corporations, institutions, or individuals. Some common examples are ICICI and HDFC.

Since public sector banks are owned by the government, they offer a lower interest rate and a lower sanctioned amount. You also get sub-par processing times. On the other hand, private banks have higher interest rates, but offer better service and slightly better processing time.

Actually, there’s a third category in India: small finance banks (SFBs). To explain that, you first need to know what a payments bank is. Payments banks are a new banking model licensed by the RBI to cater to low-income households.* These banks offer bank accounts (which can hold up to INR 1,00,000) but cannot issue loans or credit cards. However, the catch is, once they complete five years of operations, they can get an SFB license, which would allow them to begin lending money. Payments banks like India Post and PayTM have shown interest in obtaining this license (and by the time you read this, they might have obtained it already!).

So, be sure to check on this, since they might offer low interest rates, being new players.

Traditional U.S. Banks

Even before we talk about the traditional U.S. banks, it’s worth mentioning that the U.S. offers federal loans through something called the Free Application for Federal Student Aid (FAFSA).*

FAFSA is a form that you need to complete to determine your eligibility for financial aid. The good news is, federal aid is offered at a lower than normal interest rate (at times lower than 3%) and does not require a credit check. Once a FAFSA is submitted, your school works to identify the financial aid package you are eligible for and the federal government directly issues the funds to the school to cover your costs.

​danger​ Only those who are U.S. nationals, permanent residents, or eligible non-citizens can apply for the federal student aid program.* Check your eligibility, and if you fall under one of those categories, then don’t think twice about it. Go ahead and apply.

Most of you might not be eligible, though, and that’s OK! You’ve got plenty of other options. Let’s look at them now.

The major traditional banks in the U.S. that offer loans are J.P. Morgan Chase, Goldman Sachs, Wells Fargo, Citibank, and Bank of America. Most of them also have an offering specifically tailored for international students. There are two scenarios you will face here:

• Co-signer: Just like how a collateral is an asset that gives the lender some peace of mind, a co-signer is a person who promises to pay back your loan if you are not able to. Your co-signer needs to be a U.S. citizen or permanent resident, preferably with a good credit history (> 690 credit score). From our experience, co-signers are generally relatives or close friends who have been in the U.S. for a while.

• No co-signer: You can still get a loan without a co-signer, and even without a credit score. But (there’s always a “but”), these kinds of loans are what the industry refers to as subprime loans, or high-risk loans, that have pretty bad terms. The terms would most probably be worse than what you get in India, or your home country. We do not recommend this option unless you have exhausted all other options.

Whatever option you go ahead with, always get a quote, since it’s free to do so and you never know what terms they might offer.

That being said, there are other solutions on the market which need not involve a traditional bank.

Enter neobanks.

Neobanks

Neobanks is the answer to the question, what would banking look like if it went completely digital?

Neobanks are a new type of fintech entity that rose to prominence in just the past 5–10 years.* Here are a few of their characteristics:

• They operate exclusively online, meaning no physical branches

• They offer digital services, often mobile-only

• They leverage the latest technologies (like machine learning) to provide services customized to their clients

They have two ways of operating: independently or by partnering with a traditional bank.

The former kind obtain their own banking licenses and operate on their own. The latter are banks which do not have their own banking licenses, and instead partner up with a traditional bank to provide their services. Now, why would they do that?

In India, RBI, as per its 2014 guidelines, requires banks to have a physical presence in order to obtain licenses.* Hence, the only option for neobanks in India is to partner with a traditional bank and offer services. Some popular ones include InstantPay, NiYo, and RazorpayX (by Razorpay).

On the flip side, the U.S. has no such restrictions, hence neobanks can obtain their own licenses (although not all have received them yet). Some popular ones include Chime, Varo, Aspiration, and Social Finance Inc. (commonly known as SoFi).

Anish Achuthan, CEO and co-founder of Open Financial Technologies, says:*

For traditional banks, it is difficult to change their legacy technology for which they have already spent a lot. Neobanks, on the other hand, are small and nimble. […] Although all banks offer transactions through UPI (unified payment interface), customers prefer non-banking apps such as Google Pay and PhonePe, which offer the service in partnership with traditional banks.

In 2020, due to the COVID-19 pandemic and subsequent lockdowns, all industries moved their services online, and the banking sector was no exception. We can be sure that even post-pandemic, many of these changes would remain in place. Our speculation is that, with neobanks forming an integral part of the banking space, RBI might choose to offer regulatory support and eventually permit neobanks to receive banking licenses even if they operate independently. Keep an eye out for that.

In conclusion, neobanks offer many advantages over traditional banks—personalized offerings, competitive terms, real-time service (for payments, balance checks, etc.)—and you need to take advantage of that!

Non-Banks

That might sound like an oxymoron for this chapter, but bear with us.

Thus far, all the entity types we saw have been banks of some kind. However, there are other fintech entities that offer educational loans, but do not qualify as banks. In fact, because they are not constrained by the regulations set for a bank, they can do much more for you than just offer loans, like:

• set up a bank account in the U.S.

• refinance an existing loan

• provide scholarship options.

Let’s look at four examples of non-bank lenders and compare them below:

• Leap Finance is based in Bangalore and San Francisco.* They offer loans without collateral, help you open a bank account in the U.S. before you leave India, and even assist in choosing the courses during your graduate studies. Although established in 2019,* they have already raised investment of over $5.5 million from leading angel investors, including Sequoia India.*

• MPOWER Finance is based in Washington, D.C.* It is a social benefit corporation founded by former international students. Like Leap Finance, they too offer services outside educational loans, such as scholarships and job search preparation.

• Stilt Finance is based in San Francisco.* They offer educational loans for people with and without a credit score (and even to those who don’t have a Social Security Number).

• Prodigy Finance was founded in 2007 and is based in the U.K.* They only cater to students looking to pursue their graduate degree abroad. Instead of a fixed-rate option, they offer a variable interest rate option, so the total amount you pay will be tied to the variation of the three-month London InterBank Offered Rate (or LIBOR*).

Aside from non-banks aimed at helping international students, you can also look at peer-to-peer lending platforms like the aptly named LendingClub.* Founded in 2006, LendingClub allows borrowers to receive unsecured loans in the range of $1,000 and $40,000.* The standard loan tenure is three years, however, five-year tenures are available at a higher interest rate and for an additional fee. They use your credit score, credit history, requested amount, and other indicators to create the terms of agreement.

We only mentioned the few non-banks that we’ve heard of. If you don’t get a satisfactory quote from them, explore on your own (and let us know if you find a good solution!).