Benefits of choosing an education loan to finance your education

This article is authored by Kaushik Mehta, Founder and CEO of Ruloans.

Pursuing higher education is a significant milestone that can open doors to a world of opportunities. However, the associated costs can be overwhelming. This is where an education loan comes in, offering flexible terms and benefits specifically designed for students. With an education loan, you can focus on your studies without financial stress, bridging the gap between your dreams and reality.

Investing in your education is investing in your future. Education loans make quality education accessible to everyone, fostering a skilled and diverse workforce. With favourable terms and smart financial planning, these loans ensure that everyone has the opportunity to contribute to the success of our economy.

Benefits of Choosing an Education Loan

1. Tax Benefits
Education loans offer significant tax benefits under Section 80E of the Income Tax Act. Borrowers can claim a deduction on the interest paid for up to eight years from the year they repay the loan. This benefit is unique to education loans and is not available with personal loans or credit card debt, making education loans a financially prudent choice for funding your studies. Choosing an education loan also provides the advantage of a lower Tax Collected at Source (TCS) rate of 5 per cent on amounts exceeding Rs 7 lakh per financial year for studies abroad, further enhancing the financial benefits.

2. Secured and Unsecured Loans
In India, many banks and financial institutions provide unsecured education loans, eliminating the need for collateral, especially for students accepted into prestigious institutions or courses. Various flexible options are available to support your higher education journey, including secured loans up to Rs 1.5 crore and unsecured loans up to Rs 80 lakh. Additionally, government schemes like the Central Sector Interest Subsidy Scheme allow students from economically weaker sections to obtain loans without collateral up to a certain limit.

3. Benefits for Leading Institutes
Banks often provide favourable terms and conditions for students admitted to top-tier institutions, including lower interest rates, higher loan amounts, and longer repayment tenures. Such preferential treatment is not typically available with other types of loans, making education loans particularly advantageous for students aiming to study at prestigious universities.

4. Government Initiatives
The Indian government has introduced various initiatives to make education loans more accessible and affordable. Programs like the Vidya Lakshmi Scholarship, and others offer financial aid to meritorious students from economically disadvantaged backgrounds. Additionally, schemes like the Central Sector Interest Subsidy Scheme provide interest subsidies during the moratorium period, easing the repayment process​.

5. Moratorium Period
One of the most beneficial aspects of education loans is the moratorium period, granting students important financial relief to focus on their education without the burden of immediate repayments. This time frame, which often lasts from the beginning of the course until a few months after graduation, gives students the freedom to concentrate on their studies without having to worry about making quick payments. While interest may accrue during this period, payments usually don't start until the moratorium is lifted, allowing graduates to find work and stabilize their finances before having to start repaying their loans.

Smart Borrowing Strategies
To make the most of your education loan, it's essential to approach the borrowing process strategically:

• Create a Realistic Budget: Plan your finances by considering tuition fees, living expenses, and other costs associated with your education. This helps you determine the loan amount you need and ensures responsible borrowing. Effective financial planning not only provides the necessary funds but also helps in managing your budget and long-term financial health, allowing you to focus on your studies and transition smoothly into your professional career.
• Understand Repayment Terms: Education loans typically include a moratorium period, allowing you to defer repayment until after graduation. This grace period provides a crucial time to secure employment and stabilize financially before starting repayments. The extended repayment tenure, often up to 15 years, ensures lower monthly payments, making the loan more manageable for recent graduates still establishing their careers.
• Compare Lenders: Different banks and financial institutions offer varying interest rates and terms. Compare these options to find the most favourable loan for your needs, considering factors like fixed or floating interest rates, penalties, and insurance. Understanding the fine print and evaluating factors such as collateral requirements, moratoriums, and additional policies can significantly impact your borrowing experience and repayment journey.

Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ.