Student Loan Vs Self Finance to Study Abroad

The quality of education plays a vital role in determining the financial and psychological benefits one draws from their professional life. A quality education can give students a competitive edge in the job market. However, due to the high costs associated with these universities, some students are not able to pursue their dream careers. Job-oriented degree programs at prestigious universities are specifically designed to equip students with the tools needed to build a stronger tomorrow.

However, this quality education comes at a steep cost and often, meritorious students facing financial constraints are deprived of the shot at a better future merely due to lack of finances. Education loans are a viable way to fill the gaps that scholarships, grants and family resources leave behind. Most people prefer education loans over self-finance since the assurance of timely fee payment and inclusion of the complete cost of education associated with education loans can seldom be derived from self-finance.

Useful Reads

What is Self-Funding?

The definition of self-funding varies depending on the situation, but in general, it refers to individuals or businesses who have enough money in their bank account to cover all of their expenses without having to take out loans or ask for funding from other sources.

In the following cases, self-funding could be preferred:

• Paying for own education
• Asking friends, family, or family for financial assistance
• Obtaining money from a third party (Government banks or education loan lenders excluded)

How Do You Set Up a Budget for College While Paying for it Yourself?

• Financial strategy: Students should carefully prepare their finances to avoid problems later on while they are studying. They should be equipped to handle any financial challenges that could occur while they are pursuing their education.
• Scholarships: Financial aid as scholarships help students pay for their studies abroad while also expanding their chances for higher education.
• Students can improve financially and professionally through part-time employment. This helps them develop their skills while controlling living expenses while travelling.

Students turn to education loans when they don't have enough money to cover living expenses and tuition for a study abroad.

Check: Best Education Loan Providers in India for Study Abroad

Types of Student Loans

• Loans that are secured by collateral are known as collateral loans. The lender has ensured some partial payment for any unpaid loan obligation when a borrower pledges collateral to get a loan. They have the right to sell the collateral if payments are not made on time. Government and commercial banks in India are the best sources of collateral loans.
• Loans that are unsecured or without collateral do not need the pledge of any kind of security. Students who lack adequate assets to use as collateral can nonetheless access them.

With the cost of education on an exponential rise and the importance of quality education widely recognised, many have come to see education loan as an investment since it comes packed with assured returns and excellent benefits. Some of the advantages of education loans are:

Education Loan Tax Benefit

Education loan tax benefit is one of the most important advantages of an Education Loan that is taken for courses in India and abroad. It is a great way to save money while securing a better future for your children. This is one aspect that makes education loans a preferred choice over self-financing.

Education loan applicants are eligible for deductions on interest paid on the loan under Section 80E of the Income Tax Act of India, thereby lowering the rate of interest. The deductions under this section can be claimed for a total of 8 consecutive years including the year in which the loan is taken in or till the interest on the loan is fully repaid, whichever occurs earlier. It must be noted that only loans taken from gazetted financial institutions are eligible for these deductions.

Any Indian individual can claim deductions on the interesting part of the education loan availed for self, spouse, children or any other child of whom the individual is a legal guardian. It must be noted that education loans taken from friends and relatives are not eligible for tax deductions under Section 80E.

Important reminders

• No fixed cap will be put on the complete interest paid which is eligible for deduction.
• Only if the actual interest is paid on the education loan will the tax deduction be granted.
• Only individuals are eligible for a tax deduction and not HUF or other assessees.
• The education loan on which the interest should have been paid should have been obtained from a financial or other charitable institution that is approved.

Read: Studying Abroad attracts tax collected at source (TCS) of 0.5 and 5%

Improves Credit Score

Your credit score, which is a crucial factor in addressing future financial demands, can be greatly raised by applying for an education loan and adhering to the repayment terms. A respectable credit score, or CIBIL score, is required for the approval of loans and credit cards. Low credit scores can damage a person's credit reputation and are linked to economic instability.

Employers also associate reliability with excellent credit ratings in addition to loan lenders. Paying off your debts on time raises your credit standing, which is a criterion for future loan approvals such as those for a home, automobile, personal, or other types of loan. When you apply for a loan, bank representatives look at your credit history to assess your creditworthiness, which will affect whether or not your loan will be accepted.

100% Cover

In addition to the tuition charge, students often have other expenses during their higher education. These expenses include one-time registration fees, library dues, lab and equipment fees, housing and other personal expenses, among others.

Most students have access to complete education loans, which also provide cash for maintaining a healthy lifestyle while studying abroad. This relieves parents and students of financial responsibility, and prompt payment of tuition to the university or institution guarantees that a student's study period go along without any difficulties.

 Various other benefits of Education Loan (advantages of education loan) are:-

• Moratorium Period – The repayment of an education loan usually begins after a moratorium period. This period may range from six months to one year after completion of the course.
• Margin Money – Margin money is the percentage of the loan amount paid by the borrower. Most banks do not ask for margin money for loans up to 4 lakh rupees. For loans exceeding Rs. 4 lakh, margin money is 5% for studies in India and 15% for studies abroad.
• Collateral – For loans exceeding Rs. 7.5 lakh, collateral is required. Collateral is an asset pledged against the education loan and can be a Fixed Deposit, Life Insurance, Non-agricultural land, flat/bungalow etc.
• Online Application – Most banks and financial institutions have an easy online application form that can be filled out and submitted online.
• Easy Repayment – Education loans can be repaid in Equated Monthly Instalments (EMI) that are distributed through the loan tenure.
• Eligible Courses – A large number of courses leading to a graduate degree, postgraduate degree and PG diploma are eligible for education loans.
• Approval before Admission Confirmation – While most banks and financial institutions require an admission confirmation letter from the concerned college/university as a mandatory document for loan approval, some provide loan approval even before confirmed admission.
• Quick Processing Time – Another benefit of education loans is that online applications, home visits, and guidance from dedicated loan specialists have reduced the loan approval and processing time.
• Visa Approval – For students travelling overseas for higher education, a loan sanction letter can be used as evidence of funds while securing a student visa.

The ever-growing competition in the education loan sector has worked in favour of the aspirants. The process has become increasingly transparent and hassle-free. Many banks even offer doorstep service and flexible repayment terms to beat the rising competition. It is, however, advised to explore various options and examine the product benefits of every bank before zeroing in on one. Contact India’s leading education loan providers through Shiksha Study Abroad.

Related Articles:

• Step by Step Guide to Education Loans
• Collateral for Education Loan

About the Author

HDFC Credila, an HDFC Ltd. Company, is India's First Dedicated Education Loan Company. With specialized focus, in-depth understanding of the requirements of students who wish to pursue higher education, HDFC Credila offers Customized Education Loans Home Delivered! HDFC Credila has funded tens of thousands of students from India to over 2100 unique educational institutes across 35 countries!