Increasing education costs have made it unfeasible for most students to fund their education expenses through their own or their families’ finances. Availing institutional credit to finance their higher studies is increasingly becoming indispensable for most students. Those seeking to fund their education and related expenses can opt either for education loans or for personal loans depending on several factors which will be discussed below in detail.
Here is a comparative analysis of using education loans and personal loans for financing your higher education:
Loan amount
The loan amount for education loans primarily depends on the course fee and other expenses approved by the lender. The education loan amount can usually go up to Rs 1.5 crore, with some lenders offering higher loan amounts. In the case of personal loans, the loan amount can usually go up to Rs 40 lakh depending on the repayment capacity of the borrower and the cap on the maximum amount placed by personal loan lenders. As there are no restrictions on the end usage of personal loan proceeds, borrowers can also use the loan amount to finance their external coaching expenses, private lodging costs, relocation expenses, etc., which are usually not covered under education loans.
Interest rates
The interest rates on education loans are usually lower than the personal loan interest rates. Lenders offer personal loans with interest rates usually starting from 10.49% p.a., with some public sector banks offering lower rates of interest. On the other hand, the education loan interest rates usually range between 8.15% p.a. and 15.20% p.a. Lenders may also allow additional interest rate concessions of up to 0.50% to female borrowers and up to 1% to borrowers servicing their interest costs during the moratorium period. Some lenders also offer lower interest rates on their education loan schemes to borrowers pursuing their education in highly reputed institutions.
Loan tenure
The repayment tenure offered by lenders on their education loans usually goes up to 15 years. In the case of personal loans, lenders offer loan tenures usually extending up to 5 years, with a few lenders offering repayment tenures of up to 7 and 8 years. Therefore, those opting for education loans benefit from longer tenures and lower interest rates, thus leading to lower EMIs and higher EMI affordability for borrowers when compared to personal loan for education.
Moratorium period
The moratorium period in education loans refers to a tenure when loan borrowers are not required to make their EMI payments. Lenders offering education loans usually provide moratorium periods of up to 1 year after course completion or after 6 months of getting a job, whichever is earlier. The sole objective behind offering moratorium periods is to offer adequate time to students to search for jobs and then start their EMI repayments without burdening their parents’ finances. However, those availing education loans continue to incur interest costs at simple interest rates until the end of the moratorium period. Note that lenders do not offer any moratorium for borrowers using their personal loan proceeds to finance their higher education. Personal loan borrowers are required to commence repaying their EMIs right after the loan disbursal by the lender.
Tax benefits
Section 80E of the Income Tax Act allows borrowers availing education loans to claim tax deductions on the interest component of their EMI for up to 8 years after commencement of EMI repayments. Note that this tax deduction helps to reduce both the tax and interest cost burden for education loan borrowers. However, no such income tax exemptions are available to personal loan borrowers on loan repayment for financing their education.
Note that only those borrowers availing education loans from financial institutions, notified by the Indian government in its official gazette, are eligible for claiming tax deductions. Hence, prospective borrowers seeking education loans from any financial institution should first check whether it has been approved by the Central Government through its official gazette when comparing the education loan offers from multiple lenders.
Guarantor/collateral
Lenders offering education loans usually require the student’s earning parent or spouse to become the co-applicant. Some education loan lenders might also ask for a third-party guarantor(s) and/or additional collateral/security for loan amounts above Rs 7.5 lakh. However, lenders usually do not require collateral or guarantors for approving personal loan applications.
Bottom line
Education loans have more benefits compared to personal loans in terms of lower interest rates, longer repayment tenures, availability of moratorium period and tax benefits on loan repayment. Prospective applicants unable to avail education loans due to lack of collateral or inability to provide guarantors may consider personal loans for financing their higher education. Students can also opt for personal loans to finance their higher studies in case they wish to pursue courses not approved by education loan lenders, apply to institutions not within the approved list of banks/NBFCs offering education loans or seek to finance course cost components not financed under the education loan schemes.