Worrying about funding your dream education? Loan scores over self-financing

31 May, 2016

The only advantage of self-financing the education is that one does not take on a liability. Whereas, education loans are advantageous as they offer tax breaks, fee payment in EMIs, back-up for any unforeseen increase in cost and even makes one more responsible and independent

A good education helps open many doors for the child. However, education is very expensive these days. A decent education in India alone costs anything between Rs 10-12 lakh while a foreign education costs about Rs 25 lakh per year. Thankfully, one can avail of education loans to provide the best education to our kids.

Even if one has assets or savings that can be liquidated for the purpose of funding the education, experts believe it is better to opt for an education loan instead. "Unless you have some 'extra money', one should opt for an education loan as it has multiple benefits," says Neeraj Saxena, chief executive officer (CEO), Avanse, which is a joint venture between DHFL and IFC Washington. Avanse has a loan portfolio of over Rs 530 crore as of March 31, 2016.

Many parents believe in self-financing the education needs of their children. "The only advantage of self-financing a child's education is that you do not take on a liability. However, the disadvantages outweigh the advantage," says Yogita Dand, financial planner.

To raise the resources for self-financing, most parents raise funds through personal or friendly loans or they tend to dip into their retirement savings or sell off their assets to finance their child's education. "There have been cases where parents have even sold off their own houses to fund their child's education," points out Dand.

Education loans are advantageous as they offer tax breaks. "Interest paid on repayment of the education loan is allowed as a deduction without any limit under section 80E of the income tax act for 8 years,'' says Arnav Pandya, financial planner.

"In case of self-financing, fees are usually paid in lump-sum for the year/semester. An education loan eases off that burden through the option of repayment in easy EMIs which start post the course completion," says Ajay Bohora, co-founder, MD & CEO of Credila, a subsidiary of HDFC Ltd. HDFC Credila has disbursed over Rs 3,400 crore of education loans, as on March 31, 2016.

Although most education loans come with a moratorium period (when one need not pay any interest on the loan), Saxena advises parents to pay the simple interest on the amounts disbursed right from day one.

"It is not that the bank or financial institution is not charging you interest for this period. Instead your interest gets capitalised and you end up paying EMIs on a higher amount at the end of the moratorium period," points out Saxena.

The average rate of interest for an education loan today is anywhere between 10.50% to 14%, depending on multiple factors like the student's academic profile, course, institute co-borrower's profile, etc.

"For instance, for students going to the USA for degrees in fields related to STEM (science, technology, engineering and maths) with a GRE score of over 300, Avanse has a special product wherein the students do not need to provide any collateral for loans up to Rs 25 lakh. Generally, for all applicants, we look at collateral in the form of mortgage of property," says Saxena.

"An education loan also helps you create a back-up for any unforeseen increase in cost, including an increase in cost due to potential depreciation of the currency," says Bohora.

An intangible benefit of an education loan is that it actually helps the child to learn the value of money. "Many parents, despite having the funds, still opt for an education loan, just so that children become more responsible and independent" says Saxena.

Nowadays, many students plan to study overseas but the living cost often is as much as the tuition fee. Most people also worry if it is worthwhile to spend such a big amount? Yes, an overseas education from a good institute does pay off in the long run. HR professional Anukruti Khadilkar says, "A degree from a foreign university is definitely a great advantage when compared to a degree from smaller Indian institutions since employers prefer to hire candidates who have completed a degree abroad with relevant academic scores over a student who has completed the same degree and has similar work experience in India. Besides, an international degree also offers a good head start in terms of a better pay package."