Education Loan vs Personal Loan: Where to bet to fund your higher studies?

Various studies suggest that students rely on bank loans to meet the cost of their education. Finding the right source of funds for higher education is imperative to get lower interest rates, favourable terms, and other benefits. Borrowers often face the dilemma of choosing between education loans and personal loans for financing studies.

Difference between education loan and personal loan

We bring you point-by-point analysis to help borrowers weigh their options as per their needs and decide which type of loan suits them better to fulfill their academic aspirations.

Coverage of funds - One of the biggest benefits of an education loan is the cost coverage. The loan quantum that borrowers can get ranges from INR 7.5 lakhs to INR 1.5 crore. Whereas the loan amount borrowers can get in a personal loan is a maximum of INR 25 lakhs, which in exceptional cases, can be extended to INR 40 lakhs. If the purpose of taking the loan is abroad education, an education loan would fulfill that purpose better.

The interest rate - The interest rates in an education loan start at 8.45% for loans with collateral, and for loans without collateral, the interest rate starts at 10.5%. Unsecured education loans run the possibility of a higher interest rate, up to 14%. However, the interest rate on a personal loan ranges from 10.5% to 24%. Moreover, education loans come with an additional interest concession for girl borrowers of 0.5%, which is not available in personal loans.

Tax benefits - There are no tax benefits on personal loans. However, spending on education through an education loan helps borrowers save on income tax. Borrowers can claim a deduction of interest paid on a loan taken for pursuing higher education under section 80E of the Income Tax Act, 1961. Not only this, under the Liberalized Remittance Scheme (LRS), the Tax Collected at Source (TCS) on amounts in excess of INR 7 lakhs is only 0.5%, if the funds are remitted through an education loan. The TCS on funds remitted through any other source is 5%.

Government interest subsidy schemes - Apart from the above tax benefits on an education loan, several interest subsidy schemes help reduce the interest burden on the borrowers. Central Sector Interest Subsidy Scheme, Padho Pardesh Scheme of Interest Subsidy, and Dr. Ambedkar Central Sector Scheme are some of the few schemes that borrowers/students can avail of at the start of their education loan. These schemes are eligible only for education loans and not for personal loans.

Moratorium period - The moratorium period is the period when the borrower does not have to make any loan payments. In an education loan, the moratorium period is typically a course period + 12 months. Whereas in a personal loan, there is no moratorium period, and the EMI starts just after the disbursement of the loan amount.

Prepayment penalty - Prepayment is a good way to save on interest payments. Lenders do not levy any penalty charge in case of prepayment in an education loan. However, the prepayment penalty charge in personal loans can be 2.5% or more plus GST. The exact penalty charge depends on the loan amount and the lender.

Loan tenure - Another benefit of an education loan is the loan tenure of 10 years as compared to the shorter loan tenure of 5 years in a personal loan. Longer loan tenure is advantageous to students as the EMI becomes manageable.

When should you opt for a personal loan?

Personal loans are ideal when the borrower is looking for smaller sums of money for a shorter duration. The process for a personal loan is easy and quick, requiring minimal documents. The credit score is the key factor in determining eligibility for a loan. Depending on the credit score, a borrower might be pre-qualified for a personal loan.

While there are numerous avenues that borrowers can explore, education loans are the undisputed winner among them to fund higher education, whether in India or abroad. Personal loans are more suited when borrowers are looking for a quick funding solution for immediate spending.

(Author: Mr Ankit Mehra CEO and Co-founder of GyanDhan)