Education Loan vs Self-Finance: A Comprehensive Guide for Studying Abroad

Feb 09, 2024 / Reading Time: Approx. 7 mins

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Education Loan vs Self-Finance: A Comprehensive Guide for Studying Abroad

Education represents a crucial investment in shaping one's professional path and is vital towards securing a prosperous future. However, the escalating education costs, both domestically in India and abroad, pose significant financial challenges. In India, quality education can demand anywhere from Rs 5 Lakhs to 30 Lakhs, while the expenses for studying abroad often start at a minimum of Rs 25 Lakhs.

For most individuals, securing funds for education abroad is quite a challenge. Financial constraints may even deter some students from considering international education a viable option.

For parents, the dilemma of whether to dip into savings or opt for an education loan for their children's education is a daunting one. While some may find it convenient to reallocate investments, for many, the reality entails tapping into retirement funds, liquidating assets, or seeking financial assistance from friends and family. However, for those determined to live the same lifestyle without compromise, an Education Loan proves to be a good option.

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This article aims to provide an overview of education loans and self-funding, offering a comparative analysis to help readers make informed decisions about financing their educational aspirations. Whether through borrowing or self-funding, the ultimate goal remains consistent: ensuring access to quality education without compromising financial stability.

Let's start by understanding what self-finance and education loans are.

What is Self-finance?

Self-finance entails utilising individual savings, contributions from family members, or scholarships to finance educational endeavours. When applied to studying abroad, self-funding entails depending on personal resources and financial capabilities to meet expenses such as tuition fees, living costs, and other related expenditures.

What is an Education Loan?

An educational loan encompasses all expenses associated with academic pursuits throughout the duration of the course. This typically includes admission fees, tuition fees, accommodation charges, library fees, the cost of textbooks, provision for a laptop, and travel expenses if studying abroad.

To secure an educational loan, a student can approach a bank or financial institution, often requiring a parent, guardian, or guarantor to join as a co-signer on the application. While the student serves as the primary applicant, the parent assumes the role of a co-applicant.

The repayment process for the loan commences upon completion of the course. Generally, banks or financial institutions provide a grace period of six months after graduation for students to begin repaying the Equated Monthly Instalments (EMIs). This grace period is termed as a moratorium period.

During the course duration, students or their parents/guardians are typically obligated to pay a simple interest charged by the lending institutions. Following the moratorium period, which typically spans six to twelve months, students become responsible for repaying the principal loan amount along with accrued interest.

[Also Read: A Smart Way to Invest for Your Child's Higher Education]

Here are the significant differences to consider in self-finance vs education loans:

Self-finance Education Loan
Financial Burden When self-financing, the entire yearly payment is withdrawn from the account at once. Repayment of an Education Loan is done through Equated Monthly Instalments (EMIs) over a period of up to 10 years, making it financially manageable.
Coverage of Expenses The entire annual fee must be settled at the start of each semester. Additionally, one must budget for living expenses, which often constitute approximately 50% of the total cost of education. An Education Loan can include both tuition fees and living expenses. Repayment of the principal amount is deferred until after the completion of the course, with an additional grace period of six months provided by lenders before the commencement of principal repayment.
Missed Opportunity Self-financing involves tapping into savings that could have otherwise been used for investments or retained as a financial safety net for family or health-related emergencies. An Education Loan enables you to preserve your savings for investment purposes while also maintaining them for potential family or medical emergencies.
Education Funding Individuals frequently resort to withdrawing savings, selling properties, leveraging gold assets, or borrowing from family members. An Education Loan enables you to safeguard your savings and avoid the stressful process of selling assets like land or jewellery or resorting to borrowing. It empowers you to finance your education based on your academic background, present financial standing, and collateral assets.
Evidence of Funds In order to secure admission confirmation, it is necessary to provide a solvency letter demonstrating liquid funds. This entails demonstrating sufficient liquid funds to cover one year's tuition fees plus approximately 50% more, thereby assuring the university of one's capacity to meet fee payments. Loan approval from banks or NBFCs can be obtained even prior to receiving admission confirmation. In fact, students often secure loan approval at the time of applying to universities, utilising the sanction or solvency letter as evidence of funds.
Tax Benefits Tax benefits are unavailable when fees are self-financed. By obtaining an Education Loan, you can get attractive tax benefits. The entire interest amount qualifies for tax exemption without any upper limit.
Inflation Given the volatility in foreign currency exchange rates, the cost of education can fluctuate by as much as 20-30%. It can be challenging to come up with liquid funds to cover these additional expenses. At such times, having an education loan sanction can prove highly beneficial. Even if the cost rises, one can avail of a loan up to the sanctioned credit limit.
Timely Payment of Fees Keeping track of the fee payment date and ensuring the transaction is processed on time to meet university deadlines is crucial. This task becomes particularly burdensome when payments need to be sent overseas. An education loan ensures the timely payment of fees internationally when given a one-time instruction to the lender.
Impact on the Credit Score Self-financing your education does not help in building your credit history. Making timely repayments on an education loan can assist a student in building a favourable credit history and improving a credit score, facilitating access to loans for various other products, such as homes, automobiles, and more, with ease and at appealing interest rates.
Realisation of Financial Responsibility Parents funding their child's education deprives the child of the chance to assume their own responsibilities. Availing of an education loan instils a deeper appreciation for education in students and encourages them to take the mature initial step of assuming financial responsibility.
Moratorium Period There is no moratorium period for self-financing your education. Students who opt for an education loan have the option to extend their repayment period from 6 months to 15 years, depending upon the bank's terms.

[Also Read: Are You on the Right Track with Investment Planning for Your Child's Future?]

Here are some important things to consider when deciding between self-finance and education loan:

1. Better Concentration on Studies:

Funding your child's higher education independently can alleviate their financial strain, allowing them to focus on their studies and pursue their academic goals without the burden of financial worries.

2. Liquidity of Investments:

Unless one possesses capital in the form of readily available assets like cash or assets that can be easily liquidated, such as stocks, mutual funds and gold, opting for self-funding is not advisable. This is because converting assets like land or other immovable properties into cash is time-consuming. Additionally, rushing this process may result in difficulties finding a buyer or obtaining the appropriate value for the property. On the other hand, education loans can be availed of based on non-liquid assets and are readily disbursed by banks.

3. Living Expenses:

Most students and parents often overlook the cost of living when planning to finance education abroad, with some assuming part-time work can cover significant living expenses. However, restrictions on employment for foreign nationals, especially in countries like the US, can lead to financial challenges. Education loans cover both tuition fees and living expenses, offering a more comprehensive solution.

4. Proof of Fund Availability:

In countries like the US, colleges, universities, and immigration authorities require assurance of financial means before accepting admission or visa applications. Relying on the sale of assets like land, stocks, or bonds to demonstrate fund availability carries risks, as failure to secure admission renders the assets unusable. In contrast, banks and NBFCs provide certificates verifying fund availability, aiding students in gaining admission and securing visas.

5. Cost Saving:

Self-financing eliminates the need for interest payments typically associated with education loans, resulting in significant cost savings over time. Without accruing interest charges, individuals can avoid the financial burden of additional expenses and focus on funding their education through their own resources. This not only reduces the overall cost of education but also allows individuals to complete their studies without the looming pressure of loan repayment.

6. Missed Opportunities of the Assets:

Selling appreciating assets such as stocks or property to finance education abroad forfeits potential future benefits, as their value tends to increase over time. With education loans, assets pledged as collateral remain with the borrower, allowing them to retain ownership and potentially benefit from future appreciation even while repaying the loan.

To conclude:

Education loans offer numerous benefits. However, independently funding your child's higher education can alleviate their financial strain.

Accumulating savings for your child's advanced education may come with challenges, yet with early planning, even modest contributions in Equity Mutual Funds through Systematic Investment Plans (SIPs) can accumulate into a substantial fund, safeguarding your child's future.

If you face difficulties in saving and are uncertain about investment options, seeking guidance from financial planners can help you develop strategies for saving and preparing for your child's higher education.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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