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Benefits Of Education Loan And The Need To Strike A Balance

IndianMoney.com Research Team | Updated On Thursday, July 12,2018, 05:07 PM

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Benefits Of Education Loan And The Need To Strike A Balance

 

 

 

Education is the best investment you can make. It is a source to create wealth. But, quality education can be very expensive. Even a simple MBA from a reputed college/university costs a fortune. However, you can’t deny your children a quality education, just because you don’t have the money when there are education loans to avail. People are spending increasingly higher amounts on education, and increasing average ticket size of higher education loans are proof of it.

Now, whether you should dip into your savings or avail an education loan is a dilemma you may face. While it costs you around Rs 10 Lakh to Rs 30 Lakh to get a quality higher education in India, it can cost you more than Rs 30 Lakhs to get an education overseas.

Availing an education loan not only gives your children access to quality education, it also prevents you from dipping into your retirement savings.

Also, an education loan, if repaid on time, will help your children in building a good credit history. It also inculcates financial discipline.

Fixed Deposits can be a great way to fund children’s education. This is why, If you have a good amount invested in fixed deposits, you can earn an interest of around 7% a year. If you avail an education loan, you will have to pay an interest of around 11-12% a year. Would it not be wiser to liquidate FDs, rather than pay interest on the education loan?

It is wise not to disturb your retirement or emergency funds or liquidate assets to fund education when you have the facility of availing education loans. Let us learn more about education loans:

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Benefits Of Education Loan And The Need To Strike A Balance

 

What is an education loan?

 

Education loans are also called student loans. Education loans cover all expenses incurred while studying. It is a comprehensive loan which includes expenses like admission, tuition, examination, library, boarding, lodging, computers, books, travel and health insurance.

 

Features of an education loan:

 

  • Education loans are availed by students, to enjoy quality education. The parents, guardians or a third-party, have to be guarantors.
  • In the case of public sector banks, for loans up to Rs 4 Lakhs, parents have to be co-applicants.
  • For loans of up to Rs 4 Lakhs and Rs 7.5 Lakhs, public sector banks require parents to be co-applicants and also a third-party guarantor.
  • For loans over Rs 7.5 Lakhs, banks ask for collateral in addition to co-applicants and a guarantor.
  • Women applicants get an interest rate concession of 0.5%.

 

Both banks and NBFCs grant education loans, but parameters such as loan application process and terms & conditions, vary between institutions. Some private banks and NBFCs, offer high-ticket unsecured education loans for up to 15 years.

 

Education loan benefits:

 

1. Protects investments:

 

An education loan stops you dipping into your investments. Your investment may have different purposes like retirement, savings, emergency funds, medical expenses, and so on. If you disturb your investments, you disturb your financial goals. So, availing an education loan keeps your investments intact.

 

2. Contingency:

 

Your investments serve as a cushion, in case your child takes longer than the course duration to complete the course.

 

3. Tax benefits:

 

Interest paid on education loans are eligible for tax deductions under Section 80E of the Income tax Act, 1961 up to any amount. Principal repayment towards education loans have no tax benefits.

 

SEE ALSO: ITR Filing: How To E-verify ITR?

 

4. Moratorium (grace period) on repayments:

 

EMIs on education loans commence from 6 to 12 months after completion of the course. This is a relief for the newly graduated, who are just stepping into their jobs or professions.

 

5. Build credit history:

 

If the applicant makes timely repayments, it will help in building a good credit history. This enhances the applicant’s ability to access loans and other credit facilities in the future.

 

6. Teach responsibility:

 

The applicant will learn to be responsible and disciplined by managing loan repayments at an early age.

 

When to use your own funds for children’s education?

 

  • When you have been regularly investing and have no other expenses which would require the urgent need for such investments.
  • If such investments have a rate of return of 7% or less.

 

The final verdict:

 

Granted, it is wise to avoid availing loans as far as possible. But, it is not wise to dismiss an education loan at the cost of your savings.

 

Be Wise, Get Rich.

 

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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