On 8 November, 2016, the Government of India announced that two of its highest denomination currency notes, Rs 500 and Rs 1000, would cease to be legal tender in most places post midnight. Holders of these bills would have until year-end to deposit their notes into their bank accounts. In exchange the government issued new and more secure Rs 500 and Rs 2000 bills. Some of the key motivating factors for this decision include:
- Tackling black money
- Combating tax evasion
- Pushing India towards a cashless economy
- Addressing the fake currency issue.
For those who were looking to utilise unaccounted cash for living expenses abroad, there may be a short-term impact.
The unexpected announcement and the subsequent short-term cash shortage did create apprehension in the market and anxiety in a number of sectors, including education. Immediately post the announcement students looking to study abroad were debating their ambitions and analysing the financial implications. However, we believe the angst and impact for the majority of students is short term. Here are some reasons why:
Proof of funds
An important element of the application process for a number of colleges is the proof of funds where students need to effectively showcase how they are going to fund their education for the duration they are studying. Schools need to be assured, via supporting documents like proof of family funds, loans or scholarships, that the applicant is financially capable.
The typical admission cycle for students applying to colleges abroad starting Fall 2017 entails submitting applications from October 2016 to April 2017, applying for visas up to five months prior to the start date, and starting sometime from August to October 2017. The demonetisation announcement came when students, especially those applying to Europe and North America, were in the midst of admission preparation or already completing application forms. Thus, funds they were going to utilise for their foreign education should already be in the financial system.
The application cycle is still open should students wish to re-examine their choice of colleges and geographies. If required, students can widen the list of universities they are applying to and include options that provide grants and scholarships. Additionally, students can seek financial aid or consider loans either from institutions or family members.
Start of term
For those who were looking to utilise unaccounted cash for living expenses abroad, there may be a short-term impact. However, as the new academic year starts Fall 2017, it should provide students and parents sufficient time to address the issue.
The fee payable to a foreign university, which can range from US$30,000 to US$75,000 per year, is required to be remitted by the student from an official bank account before the semester commences. As the financial costs are high, parents and students tend to not only start saving but also investing for this journey a number of years prior to application through systematic savings plans etc. which are usually saved from monthly salaries directly. For these reasons, students are likely to have their funds secured in financial assets and instruments rather than cash.
A number of students apply for loans to study abroad, pledging their family home as collateral to finance their tuition and living expenses. The demonetisation campaign has led to banks lowering interest rates at the start of the New Year. A flood of cash into the banks into deposits means that the banks will have to cut their margins to get those deposits back out the door again as loans.
Lower interest rates create a favourable situation for students and parents who are looking to secure a loan to fund their foreign education.
The State Bank of India, the country's biggest lender by assets, cut its benchmark lending rate by 90 basis points across various maturities, after experiencing a surge in deposits. Lower interest rates create a favourable situation for students and parents who are looking to secure a loan to fund their foreign education.The interest rate on a loan is the percentage of the principal, or overall loan amount that one will have to pay back to the lender on top of the principal. That's why even a slightly lower interest rate can save the borrower a lot of money in the long run, thus reducing some of the impact demonetisation may have made on their funding strategy.
Every year, thousands of students travel to foreign countries to build on their academic credentials. A study abroad decision is a long-term investment students make in themselves. For most parents/students this is not an impulsive decision but one that has been considered and planned for in advance. The demonetization announcement may present some immediate roadblocks or hesitation, but as the admission cycle is still ongoing and term start dates are six months out, it provides candidates enough time to align all the necessary financial requirements and not compromise on their study abroad endeavor.