Money
The many benefits of taking an education loan
Summary
The quantum of finances that students can borrow exceeds the amount they or their parents could have saved
An education loan offers several benefits. The most obvious one is that loans are an easy financing option that covers almost 100% of the expenses incurred during the span of education. The quantum of finances that students can borrow exceeds the amount they or their parents could have saved. Limited savings also lead to restricted spending and could probably make the dream university out of reach. Mint tells you some benefits a student can get from an educational loan.
First, it can be better to take an education loan instead of using parents’ personal savings. Adhil Shetty, chief executive, BankBazaar.com, said, “Education loan rates are low today. This provides an opportunity for eligible borrowers to borrow big and not worry about interest at this point. The family chooses to seek bank financing or self-finance with their own funds. After all, the family may have been saving up for years for financing the child’s education. However, the current environment allows the student a chance to get financing cheaply. This would allow the family’s funds to remain invested for higher returns and not impede their wealth creation goals. Finding the right balance between self-financing and bank financing would be ideal so that they get the best of both worlds."
Secondly, education loans are eligible for double tax benefits. Ankit Mehra, founder and CEO, GyanDhan, an edu fintech company, said that the Central Sector Interest Subsidy allows the applicant to avail a tax deduction on the interest paid in an education loan under Section 80E of the Income Tax Act. The applicant/co-applicant can avail this exemption for a maximum of eight years, and there is no cap on the deduction amount.
The second benefit is a reduced tax collected at source (TCS) on overseas education loans; if the foreign exchange transactions of a student exceed ₹7 lakh in a financial year, the TCS is 5% without an education loan.
“However, students who take an education loan to finance their studies abroad are eligible for a concession and lower 0.5% TCS. Considering the loan amount for a foreign education will be well beyond ₹7 lakh in a financial year, the tax could be excessive, an added expense," said Mehra.
Thirdly, education loans provide students with a moratorium period, meaning the applicant does not have to pay his/her education loan during the moratorium period. The lender charges simple interest during the study period, and it is accumulated and added with the equated monthly instalments (EMIs). The process helps students reduce the financial burden that the lender won’t force them to repay while studying. Compared to a personal loan, a famous albeit significantly overpriced option, education loans give room to the students to decide when they are stable enough to start repaying the loan. Personal loans do not offer a moratorium period to borrowers.
