5 Reasons Why Education Loans are Better than Other Loans to Pay for Higher Education

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Why Education Loans are Better?

5 reasons why education loans are better than all other types of loans to pay for higher education

Throughout history, a lot has changed in how loans are sanctioned, repaid and recovered. According to experts, the first mention of loans was found more than 4000 years ago. It started with people helping each other by lending extra resources to the ones who needed them. Initially confined between familiar parties, it was not long before unfamiliar sides got involved in the lending-borrowing exchanges. Since the trust factor was low, a need for a guarantee for repayment of loans came up. This is known as “collateral security” in the present day.

A lot has changed since then and many aspects of lending/borrowing have been regulated as humankind has progressed. Fast forward to 2020, we have a wide range of loans that can be used for different purposes. Education loans are one of them.

Though other loans such as personal loans, mortgage loans and so on can be taken for different purposes including to fund higher education, study loans are always preferable for the purpose. Here are 5 reasons why:

Reason no. 1. 100% Loan Financing

Unlike most other types of loans where you have to pay “margin money” for the loan, an education loan is probably the only one where you can get 100% loan financing. Margin money refers to the amount you (as the borrower) contribute to the overall amount required.

For instance, if you need Rs. 10 lakh to pursue higher education, you can get a loan of Rs. 10 lakh under education loan provided that the bank is satisfied with your repayment capacity. However, for other types of loans, you may have to provide margin money of at least 15% (Rs. 1.5 lakh) while the lender bank offers the rest (Rs. 8.5 lakh).

Reason no. 2: Collateral-free Loans up to Rs. 4 lakh

Most Indian banks and lenders offer collateral-free loans up to Rs. 4 lakh. In some cases, the banks may offer unsecured loans up to Rs. 7.5 lakh. Most other types of loans excluding personal loans are secured loans which means that the borrowers must furnish collateral to secure the loan.

But in education loans, if you need a loan of up to Rs. 4 lakh (or sometimes even higher), you will not have to provide collateral security for the loan, only having a parent or a guardian as the co-borrower of the loan is sufficient.

Reason no. 3: Suitable Moratorium Period

The moratorium offered on education loans is usually the sum of the course period and a period of 12 months after course completion or 6 months after landing a job, whichever is earlier. Whereas, the repayment period of most other loans starts a month after the complete disbursal of the loan.

Though a few loans may offer a small moratorium period, however, the moratorium period offered under most education loans is more suitable since it allows the students to focus on studies. The best part is that if the student decides to pursue the next higher level course and avails of a new loan, the moratorium period is extended further for the course period and 6 months to 12 months afterward.

There is a caveat here, however. In education loans, even though the moratorium exists for a longer period, the loan does accrue interest on the principal utilised. This means if your first year fees total Rs. 5 lakh, the interest on this loan will accrue from the time the loan is disbursed to the college till the time you start making payments.

If the amount used in the second year is Rs. 6 lakh and Rs. 8 lakh, then the interest will accrue on them from the time in the second year and third year when the loan amount was paid to the college.

As such experts suggest you should pay off the loan EMI as early as it is possible.

There is a caveat to this caveat which we cover in Reason no. 4 below.

Reason no. 4: Tax Benefits Under Section 80E

When repaying an education loan, borrowers can avail of deductions under Section 80E of the Income Tax Act, 1961. These tax benefits can be availed on interest repayments of the loan up to a maximum time period of 8 years. Other loans may not offer tax benefits.

This means that even if you accrue interest on a loan during the moratorium, you may get IT deductions on the same. And yes, we know it may seem like a convoluted process to charge you interest and then give you IT deductions on the education loan but unfortunately this is how it works.

Reason no. 5: Pre-admission Sanction

The cost of higher education is rising day by day which means that students from economically weaker sections of the society may worry about getting a loan when they apply to different educational institutions. They may not apply to institutes where they think that the fees is relatively higher and they cannot afford it. However, some banks offer pre-admission sanction facility which means that the borrower can get preliminary loan approval before even securing admission in an institute

A Final Word

So, here were the 5 things that make education loans more suitable for the purpose of paying for higher education as compared to other loans.

If you want to learn more about education loans, please check out our education loans section. We have covered education loans from major Indian banks in detail and also shared other information you need before applying for an education loan.

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