Rising education costs have made it challenging for most students to cover their education expenses through personal or family savings alone. As a result, obtaining institutional credit to finance higher studies has become necessary for many. Students looking to fund their education and related expenses can opt for education loans or apply for personal loan, depending on various factors which are discussed in detail below.
Here is a comparative analysis of using personal loans and education loans for financing your higher education:
Loan amount
The loan amount for education loans is primarily determined by the course fees and other expenses approved by the lender. The education loans usually can go up to Rs 1.5 crore, with some banks offering even higher amounts. On the other hand, personal loans usually have a maximum limit of up to Rs 40 lakh, depending on the borrower’s repayment capacity and the lender’s cap on the loan amount. Since personal loans have no restrictions on end usage, borrowers can use the funds to cover relocation expenses, external coaching fees, private lodging costs and other expenses that are usually not covered under education loans.
Interest rates
The interest rates on education loans are generally lower than those on personal loans. Personal loan interest rates usually start from 10.49% p.a., though some public sector banks may offer lower interest rates. In contrast, education loan interest rates usually range from 8.15% p.a. onwards. Lenders may also provide additional interest rate concessions of up to 0.50% to female borrowers and up to 1% to borrowers who pay interest costs during the moratorium period. Additionally, some lenders also offer lower interest rates on education loans to students attending highly reputed institutions.
Loan tenure
Lenders usually offer repayment tenures of up to 15 years for education loans. In contrast, personal loans generally have shorter tenures, usually up to 5 years, although some lenders may extend them to 7 or 8 years. As longer tenures result in lower EMIs, availing an education loan can help borrowers to avail of bigger loan amounts than personal loans.
Moratorium period
In education loans, the moratorium period refers to the loan tenure, during which borrowers are not required to make EMI payments. Lenders usually offer a moratorium of up to 1 year after course completion or 6 months after getting a job, whichever is earlier. This moratorium period has been designed to give students some time to find employment before beginning their EMI repayments, easing the financial burden on their parents. The interest continues to accrue at simple interest rates during the moratorium period. However, personal loans do not offer any moratorium for financing higher education, requiring borrowers to start EMI payments immediately after the loan is disbursed.
Tax Benefits
Under Section 80E of the Income Tax Act, borrowers who avail education loans can claim tax deductions on the interest component of their EMIs for up to 8 years after they start repaying EMIs. This deduction helps to lower both the tax and interest cost burden for borrowers availing education loans. However, personal loan borrowers do not get any such tax exemptions on loan repayment for financing their education.
It’s important to note that only borrowers who apply for education loans from financial institutions recognized by the Indian government in its official gazette are eligible for these tax deductions. Therefore, prospective education loan borrowers should verify whether the financial institution offering the loan is approved by the Central Government through its official gazette when comparing education loan options from various banks and NBFCs.
Guarantor/collateral
Lenders providing education loans often require the student's earning parent or spouse to act as a co-applicant. For loan amounts exceeding Rs 7.5 lakh, some lenders may also request a third-party guarantor or additional collateral/security. However, personal loan applications usually do not require collateral or guarantors for approval.
