Taking a Personal Loan for Education? Consider These Key Factors

Higher education can be expensive, with tuition fees, accommodation, and other academic costs adding up quickly. Scholarships and grants may reduce the burden, but they do not always cover the full expense. In such cases, students and parents look for financial assistance to bridge the gap. 

Two common funding options are education loans and personal loans. Each has distinct features, repayment structures, and eligibility criteria. A personal loan could offer flexibility, while an education loan may provide structured repayment benefits. Understanding key factors such as interest rates, tenure, and tax benefits is crucial before making a choice. 

Interest Rates and Charges

Interest rates on loans vary based on the lender, applicant’s credit score, and loan amount. Education loans typically have lower interest rates than personal loans. However, for those who do not meet the eligibility criteria for education loans, a personal loan could be an alternative.

Many banks and NBFCs may offer personal loans with interest rates ranging within a broad range, depending on factors such as income, credit score, and tenure. In comparison, education loans could have lower starting rates but may require collateral for higher amounts. Apart from interest rates, borrowers should check processing fees, prepayment charges, and late payment penalties, as these costs could impact the total repayment amount.

Loan Amount and Tenure

Personal loans may offer flexibility in loan amounts, with some lenders providing options within a broad range based on the applicant’s profile. The tenure for a personal loan is usually limited to a few years, which could result in higher monthly repayments.

Education loans, on the other hand, may offer higher loan amounts for courses at recognised institutions. These loans could cover tuition fees, accommodation, and other academic expenses. The tenure for education loans might extend for a longer period, reducing monthly repayments but increasing the total interest paid over time.

Eligibility Criteria

Eligibility requirements for personal loans differ from education loans. Banks and NBFCs assess factors such as:

• Applicants must have a stable income, as lenders assess repayment capacity before approval
• Most lenders may require a minimum monthly income, which could vary based on the applicant’s profile and lender policies
• Both salaried and self-employed individuals may apply, but income criteria and documentation requirements differ
• A higher credit score (typically above 750) could improve approval chances and result in lower interest rates
• Age eligibility usually ranges between 21 and 60 years, though some lenders may have different limits
• Lenders may also consider employment stability and existing financial liabilities before approving the loan

For education loans, eligibility depends on the student’s academic performance, the institution, and co-applicant details. Most education loans require a co-applicant, such as a parent or guardian, who has a stable income.

Collateral Requirement

Personal loans are usually unsecured, so borrowers may not need to pledge any assets. However, lenders could charge higher interest rates due to the increased risk.

Education loans may require collateral for higher amounts, depending on the lender’s policies. Some lenders might offer unsecured education loans up to a certain limit, while larger amounts could need security like property or fixed deposits.

Repayment Structure

Personal loans typically have a fixed repayment schedule, with monthly instalments starting immediately after disbursal. There is no moratorium period, so repayment begins without delay.

Education loans may offer a moratorium period, allowing students to start repayment 6 months to 1 year after course completion. This could help reduce financial burden until they begin earning.

Tax Benefits

Education loans offer tax benefits under Section 80E of the Income Tax Act, 1961. Borrowers can claim a deduction on the interest paid for up to 8 years. This benefit is available only on loans taken for higher education from recognised financial institutions.

Personal loans do not offer tax benefits for education expenses. The interest paid on a personal loan is not deductible under any section of the Income Tax Act.

Disbursement Process

The disbursement process differs between the two loan types. Personal loans are processed quickly, with funds disbursed within 24 to 72 hours, depending on the lender. These funds are transferred directly to the borrower’s account, allowing them to use the amount as needed.

Education loans take longer to process. Lenders verify admission details, academic performance, and other documents before approval. Once approved, the amount is disbursed directly to the educational institution in instalments or as required by the course.

Purpose and Flexibility

Personal loans offer flexibility in fund usage. Borrowers can use the amount for tuition fees, accommodation, books, travel, or any other personal expenses. There are no restrictions on how the funds are spent.

Education loans are structured specifically for academic purposes. They cover tuition fees, hostel expenses, and related costs. Lenders may not allow the use of funds for non-educational expenses.

Credit Score Impact

A personal loan affects the borrower’s credit score from the moment repayment begins. Timely payments improve the score, while defaults may lower it.

Education loans offer a grace period, so students can focus on their studies before repayment starts. If repayments are made on time, it helps build a strong credit history. However, missed payments could affect both the student and the co-applicant’s credit score.

Which Loan to Choose

The choice between a personal loan and an education loan depends on the borrower’s financial situation, eligibility, and repayment capability.

A personal loan may be suitable for those who:

• Need funds quickly for education-related expenses
• Do not meet the eligibility criteria for an education loan
• Prefer a shorter tenure with fixed repayments

An education loan could be a better option for those who:

• Qualify for lower interest rates and tax benefits
• Require a longer tenure and moratorium period
• Need a structured repayment plan linked to their education

Conclusion

Both personal loans and education loans provide financial support for higher education. However, they differ in interest rates, tenure, tax benefits, and repayment structures. Borrowers should compare their options, check eligibility, and understand the costs involved before making a decision. Selecting the right loan could help manage education expenses effectively while reducing financial stress in the long run.