Student Loans vs. Self-Funding: Is Taking Education Loans Worth It?

Planning to study abroad involves important considerations, such as securing funding and figuring out how to pay for education. Financial constraints often discourage students from even dreaming of studying abroad. Many parents see self-financing as a viable option, either by liquidating valuable assets or arranging funds through family friends, and relatives. However, not all families have access to such financial resources. This is where a student loan can be beneficial. Keep reading to uncover the real winner in the student loans vs self-funding battle .

What Exactly Qualifies as Self-Funding?

One may prefer self-funding in the following circumstances:

• Paying for own education
• Requesting financial help from family, friends, or relatives
• Securing funding from a third party (Government banks or education loan lenders excluded)??

Types of Education Loans

Today's students are more career-focused and seek quality education to help them achieve their goals. Traditional resources, such as borrowing money from relatives and friends, have become prohibitively expensive, making it nearly impossible to fund a complete quality education with years of savings. When students lack sufficient funds to cover living expenses and tuition fees for a course abroad, they often turn to education loans.

There are basically two types of education loans -?

Secured Loans (Collateral Loans)

Secured loans are offered based on collateral security. When a borrower pledges collateral to obtain a loan, the lender is assured some form of compensation for any outstanding loan debt. If payments are not made on time, the lender can seize the collateral and sell the property. In India, the best providers of collateral loans are government and commercial banks.

Unsecured Loans (Non-Collateral Loans)

Unsecured loans do not require the pledging of any collateral and are available to students who do not have sufficient assets to use as collateral. However, when considering unsecured loans, factors such as the parent's income, university ranking, and tuition fees are taken into account.

Choosing Between Self-Funding and Student Loans for Studying Abroad

When deciding between self-funding and student loans for studying abroad, several factors come into play. Let's explore the differences between these two options:

1. Financial Burden: Self-funding often involves liquidating all your savings and precious assets, such as gold, fixed deposits, insurance policies, property, and more. This can be financially draining and leaves you with little financial security for future emergencies. On the other hand, student loans allow you to preserve your savings and assets. By repaying the loan on time, you not only save your money but also maintain a safety net for any family emergencies that may arise.
2. Monetary Advantages: Self-funding does not offer any specific monetary advantages beyond avoiding debt. In contrast, student loans typically come with lower interest rates, flexible repayment terms, a repayment holiday period for students, and even government subsidies. These benefits make student loans an attractive option for those seeking financial support for their education.
3. Proof of Funds : Universities often require a solvency letter to confirm acceptance, which means you need to demonstrate your payment capability. Self-funding requires showing approximately one year's worth of cash plus an additional 50% in your account. With a student loan, the bank provides a solvency letter as proof of finances, simplifying the process and reducing the pressure on students and their families.
4. Moratorium Period : Self-funding does not offer a moratorium period, as there is no repayment structure involved. In contrast, student loans from government banks provide a loan repayment holiday during which students are not required to make payments to the bank. This period typically extends for the duration of the course plus an additional 6 months to a year. Additionally, the repayment period can be extended for up to 15 years, providing flexibility and easing financial pressure on students.
5. Arrangement of Large Funds: Self-funding requires students and their parents to plan and save money for years or arrange large sums in a short period, which can be nearly impossible. Student loans eliminate this challenge by disbursing the necessary funds at regular intervals. If a student needs a large sum quickly, they can request a larger loan amount against their collateral value.
6. Coverage of Multiple Expenses: Managing additional expenses such as housing, fees, food, and other necessities can be challenging with self-funding. Student loans, however, cover all essential expenses, including rent, food, and even items like a laptop, making it easier for students to focus on their studies.
7. Currency Rate Fluctuations: Rising inflation and fluctuating currency rates can strain students who self-fund their education. Student loans, on the other hand, are unaffected by these fluctuations, providing a stable financial solution for students studying abroad.
8. Benefits under Section 80E of the Income Tax Act: Self-funding does not offer any tax benefits. Student loans, however, allow for a deduction in the interest rate for abroad studies, providing an additional financial advantage.
9. CIBIL Score : Self-funding does not contribute to building a CIBIL score, as it does not involve EMI payments. With a student loan, timely repayment builds a positive credit history, relieving parents of financial responsibilities and encouraging students to take charge of their financial future. This motivates them to excel in their careers.
10. Tax Benefits on International Remittances: According to Section 206C of the Union Budget for 2020-2021, students who self-fund must pay a 5% Tax Collected at Source (TCS) on overseas remittances. For those using financial institutions to back their study abroad expenses, the TCS on remittances is reduced to 0.5% on payments over INR 7 Lakh, offering significant financial relief.

Overall, while self-funding might seem like a straightforward option, student loans provide numerous benefits, including financial flexibility, tax advantages, and the ability to preserve savings for future needs.

In most cases, students are advised to opt for an education loan instead of self-funding due to the additional benefits that loans offer. With rising costs making it difficult for students to secure funding for their studies, education loans present a viable solution. If you're considering an education loan for studying abroad, GyanDhan offers free expert assistance to help you secure the funding you need. To begin, check your loan eligibility today !