Pursuing higher education is expensive, and education loans have become a popular way to finance it. However, it is essential to consider the pros and cons of taking an education loan before deciding. In this blog, we will discuss the advantages and disadvantages of education loans and help you decide if it’s the right choice for you.
What is an Education Loan?
An education loan is a type of loan that helps students finance their education expenses, including tuition fees, accommodation, books, and other related expenses. Education loans can be availed from various financial institutions, including banks, NBFCs, and the government.
Advantages of Education Loans:
- Helps in Financing Education Expenses: Education loans help students fund their education expenses, allowing them to pursue higher education without financial constraints.
- Collateral: Application can be easier if the loan amount is less than four lakhs as collateral is unnecessary. Tangible collateral and guarantor can help you reduce a loan’s interest rate and apply for a higher amount.
- Tax Benefits: Education loans offer tax benefits under Section 80E of the Income Tax Act, which allows borrowers to claim a deduction for the interest paid. There is no limit on the maximum amount that is allowed as a deduction. The tax benefit is not allowed for principal repayment. Taxpayers opting for the new tax regime cannot claim the 80E deduction.
Disadvantages of Education Loans:
- Accumulation of Debt: Education loans can result in significant debt, which can take several years to repay. A good way to reduce this burden is to make interest payments during the deferment period (during the course) to reduce the EMI burdens when the repayment starts. The loan interest starts compounding once the course ends.
- Limitations on Loan Amount: Financial institutions or banks may have restrictions on the amount of loan a student can take, which may not be sufficient to cover all the education expenses.
- Repayment Obligations: Students must start repaying their loans after a predefined gap (usually 1 year) after completing their course regardless of whether or not they secure employment. This can be challenging if they do not find employment immediately after graduation or the income is insufficient to sustain the EMIs. Having a repayment is hence crucial before you opt for the loan.
- Interest Accrual: Interest on a simple interest basis starts accruing on education loans during the moratorium period (the deferment period), which can significantly increase the total repayment amount.
Should You Go for an Education Loan?
Deciding whether to take an education loan depends on several factors, including your financial situation, career prospects, and the institution you plan to attend. If you have a strong career plan and the institution you plan to attend has good placement opportunities, an education loan may be a smart investment in your future. However, if you are unsure about your career prospects or the quality of education, it may be best to consider alternative funding options. Your academic background, favorable prospects for the education you will be pursuing, and the quality of education institution are some crucial factors that lenders look for. These factors can also improve your eligibility.
Education loans allow students to pursue their dream education without financial constraints. However, it is essential to consider the pros and cons before deciding. Ultimately, an education loan can be a smart investment if you have a clear career plan and the institution you plan to attend offers good placement opportunities.
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~ Nischay Avichal