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Education or personal loan: Which is better way of financing higher education?

Gaurav Gupta
One can avail a higher sum through a personal loan. (Representational Image)

Cost of education is on an incessant upward trajectory and the fee are not going to decline anytime soon. Then how can one have the best education without breaking the back of their parents or burning out all the savings? Education loans can be a feasible answer. Loans were considered to be a taboo at some point but now it is not only a tax-saviour but also can help a student learn personal finance without holding back on the choice of course or college.

While Indian students are now slowly opening up to the idea of taking loans to pursue higher education. Not many of them are aware of what type of loan to chose when and might end up paying more. Fundamentally, there are two distinct choices when it comes to funding higher education - personal loan and education loan.

Let us begin by understanding the basic differences between the personal loan for education and education loan:

Personal loans are unsecured loans that can be availed by the parents or students to fund the education. The amount, tenure and interest on the loan will be completely dependent on the applicant's income, the company s/he is working with and the past credit score. The loan applicant, in this case, can also be the parent of the student, if the student is not earning.

Education loans are loans that are availed by students to fund their education and are backed by a guarantee of the parents or collateral in case of a huge loan amount. The loan is extended for the sole purpose of admission to a college or university and the amount of loan granted covers the basic expenses of that course, which can vary from bank to bank.

The loan applicant, in this case, is the student and hence, the student holds the primary responsibility of repaying the loan from his income once s/he starts earning. The parents have to pitch in as a guarantor only when the student fails to meet the repayment obligations.

The table below gives a comparison of key terms of education loans and personal loans taken for education purposes.

Education Loan Personal Loan for Education
Eligible Courses Courses of reputed and approved courses in India and abroad Loan can be taken for any course
Loan amount Covers basic cost of the course. Up to INR 30 lakh, in case of admission to IIT/IIMs Can be higher or lower than the course amount. Up to INR 30 lakh, depending on parent's income
Loan Applicant Student, backed by parent's guarantee Parent or student
Margin Requirement 0-15% depending on the loan amount None
Co-applicant Yes Not mandatory
Collateral/Third party guarantee Required for loans above Rs 7.5 Lakh Not required
Loan Tenure 7-15 years 2-5 years
Moratorium period One year after the course gets completed or six months after the job Typically none
Interest Rate 8.6%-24% 10.75% – 24%
Tax Benefit Tax exemption allowed for students on interest paid No tax exemption
Documents Required KYC, Income, CIBIL, Bank Statements, Admission proofs, mark sheet of students, etc, KYC, Income, CIBIL, Bank Statements of the applicant and basic admission proofs.

(Source: MyLoanCare.in)

Based on a comparison, education loan can be an ideal option for students who get admission to reputed and approved institutions in India or abroad and are looking for a low-cost loan to reduce the stress on their parents for funding their education.

However, remember that for higher loan amounts, banks may still insist to have parents as a co-applicant, a third party and collateral security.

Moreover, the loan amount may be restricted up to 85-100 per cent of the basic study cost and at times may not be enough to cover the ancillary personal expenses incurred for the studies.

The rate of interest on loans taken for education in Indian Institute Technology (IIT) or Indian Institute of Management (IIM) start from 8.5-9 per cent, but can be fairly higher for other courses and for loans of a higher amount.

Since banks offer education loans at subsidised rates and with a moratorium period which offers flexibility to the students to repay the loans once they start earning the course. However, the same may not hold true in some situations.

Personal loan for education also has a use case for funding education in case of well-earning parents or working students who want a higher loan amount enough to cover the complete cost of education as well as other incurred ancillary cost. A personal loan may also come handy for students who are seeking admission in a course, which is not in the approved list of banks for higher studies.

The loan amount eligibility is based on the loan applicant's repayment capacity irrespective of the education cost. Further, these loans are easy to avail with no collateral required and lesser documentation requirements as compared to education loans. The rate of interest for applicants working with reputed companies can be fairly low starting from 10.75 per cent and hence, can be a match to education loan in many cases.

To summarise, both education loan and personal loans for education can be a feasible choice for students or parents depending on the current financial standing of parents or students, the course in which admission is being sought, availability of collateral, loan amount and the level of flexibility preferred. Hence, it is advisable to evaluate the two options thoroughly before choosing the one that best suits your requirements.

– The author is co-founder and CEO, MyLoanCare.in