Higher education has become a necessity rather than a choice for Indians who intend to get ahead in life. But with skyrocketing costs of higher education, few of us can actually afford to fund higher studies out of our own pocket. Among the different options available to those seeking a loan for higher studies, education loan and personal loan are among the top choices. The following are some key reasons why education loan is more suitable to finance your education than a personal loan.
- Moratorium period
It is defined as that time during the loan tenure when a borrower is not required to repay the loan. It is the waiting period before the regular EMI repayments begin. In case of personal loans, the repayment begins almost as soon as the loan is disbursed. As there may be a time lag between completing studies and landing a job, the provision for moratorium period has been made in case of an education loan. During the moratorium period, the bank will calculate the interest rate on simple interest basis. Some banks also offer concessional interest rates to those who arrange to pay the interest during the moratorium period.
In the case of personal loans, no waiting period is available and your EMIs start immediately.
- Repayment tenure
Most education loans have a tenure ranging between 5 and 7 years as students cannot start paying the high EMIs just out of college. Punjab National Bank offers education loans that can be repaid within 10 years. In case of loan amounts exceeding Rs.7.5 lakhs, repayment tenure can go up to 15 years. In case a student is unable to find a job in the moratorium period, he/she can request for an extension on the loan repayment tenure. But you must keep in mind that a longer tenure will increase your total interest payouts.
Personal loans are available for a period extending up to 5 years and not beyond.
- Tax benefits
In the case of education loans, borrowers also stand to gain from tax benefits under Section 80E of the Income Tax Act. The benefit is available on the interest amount alone. The tax deduction can be claimed only after the loan repayment has started. Also, it is available for a period of 8 years, so if your loan continues beyond this period, no tax benefits will be available.
Unlike education loan, personal loans do not offer any kind of tax benefits unless the loan amount has been used towards home renovation. To claim this tax benefit, one has to submit bills as proof.
- Interest Rates and Processing Fees
When you decide to opt for any loan, the most important factor which you must compare is the interest rate. Traditionally, education loan is offered at a much lower rate than a personal loan. Hence, it makes sound financial sense to take an education loan instead of a personal loan to fund your higher studies. Additionally, the processing fees applicable to an education loan are lower than that applicable to a personal loan.
Table 1: Comparison between Education Loan and Personal Loan on key parameters
|Parameter||Education Loan||Personal Loan|
|Repayment tenure||5 – 15 years depending on loan amount||Up to 5 years|
Table2: Comparison between education and personal loans offered by leading lenders*
|Lender||Education Loan||Personal Loan|
✓ Up to Rs.4,00,000 at 16.05% p.a.
✓ Between Rs.4,00,000- Rs.7,50,000 at 17.50% p.a.
✓ Above Rs.7,50,000 at 15.50% p.a.
| Upto Rs.15 lakhs at 15.50% to 24% per annum, Processing fee: 1.5% – 2% excluding Service Tax|
|Repayment Tenure: 5 years|
| Repayment Tenure :Up to 7 years|
|State Bank of India|| ✓ Up to Rs.7,50,000 at 11.10% p.a|
✓ Above Rs.7,50,000 / 10.75 % p.a
|Upto: 25 times monthly salary in the range of 12.45% to 12.95% p.a. with a processing fee of 2% to 3% +Service Tax|
|Repayment tenure: 1 to 4 years|
|Repayment Tenure: Ranges from 5-7 years|
|HDFC|| Loan amount/Interest Rate:|
Upto 10 lakhs for education in India at 12.49%
| Upto Rs 25 lakhs at 12.50% to 19.50%|
|Repayment tenure: 1-5 years|
|Repayment Tenure: Up to 15 years post moratorium period|
|ICICI|| Upto Rs 10 Lakhs for education in India at 11%|
Upto Rs.20 lakhs for education abroad
| Upto Rs 20 lakhs at 11.49% to 22.00 % with a processing fee of 2.5 %|
|Repayment Tenure: 1 to 5 years|
|Repayment Tenure: Ranges from 5 to 7 years|
*The facts and figures provided are indicative and subject to periodic change.