Pursuing higher education, whether in India or abroad, the financial burden of pursuing higher education can be heavy. Even with scholarships, grants, and parental support, many students and parents turn to loans for tuition, living costs and other expenses associated with pursuing a course of study. At this point, one of the questions that arises is should you take an education loan or take a personal loan for studies?
Both can provide quick and easy funding, but they function in two very different ways. On one hand, education loans, which are specifically for students, offer benefits such as lower rates of interest, repayment flexibility and in certain cases, even tax deductions. The personal loan is a more common form of loan, you can borrow money quickly, with less documentation and get it faster. However, it often has higher interest rates and less flexible repayment terms.
In this blog, we will cover the pros and cons of taking education loans and personal loan for studies, compare their features and help you determine which option is best suited to help you fund your education dreams.
What is an Education Loan?
An education loan is a loan made available by banks and financial institutions to assist students fund a higher degree of education either in India or overseas, which covers the cost of tuition fees, hostel charges, examination fees, books, travel and other expenses incurred in the course of their studies. Usually, the loan feature a moratorium period (repayment holiday) for the duration of a course plus some months which allows students to start repayment once they’ve earned.
What is a Personal Loan for Education?
A personal loan for education is an unsecured loan that can be used by students or parents to fund any study-related expenses. It is an unsecured loan specifically for education purposes, generally not requiring collateral/margin money, not requiring proof of admission, and much quicker and even easier to get often without collateral depending upon your credit worthiness to access available funds. The amount used can be directed to tuition fees but also living costs, travel, gadgets, or whatever personal use needs you want to directed to. However, personal loans normally come with higher interest rates and shorter repayment tenures than an education loan repayment terms.
Key Differences Between Education Loan and Personal Loan
While both education loans and personal loans can be used to finance studies, they differ in terms of purpose, benefits, and repayment flexibility. Below are the major differences:
| Aspect | Education Loan | Personal Loan for Education |
|---|---|---|
| Purpose | Specifically designed to cover educational expenses like tuition fees, books, hostel charges, travel, etc. | A multi-purpose loan that can be used for education or any other personal need. |
| Collateral Requirement | Collateral/security may be required for higher amounts (generally above ₹7.5 lakh). | No collateral required, fully unsecured. |
| Interest Rate | Lower than personal loans; also eligible for interest subsidy schemes (like CSIS). | Higher compared to education loans. |
| Moratorium Period | Offers a repayment holiday (course duration + 6–12 months) before EMIs begin. | No moratorium; EMI starts immediately after disbursement. |
| Loan Tenure | Longer repayment period, up to 10–15 years. | Shorter repayment tenure, usually 3–5 years. |
| Loan Amount | Higher loan amounts possible (up to ₹1.5 crore depending on bank and course). | Lower amounts sanctioned compared to education loans. |
| Tax Benefits | Eligible for tax deduction under Section 80E of the Income Tax Act. | No tax benefits available. |
| Eligibility Criteria | Requires proof of admission, academic performance, and co-applicant details. | Based on applicant’s or co-applicant’s income and credit score; admission details not mandatory. |
Why Students Consider Loans for Higher Education?
In India as well as globally, the trends show that expenses related to higher education are rising. From tuition fees to living costs, travel, study material, accommodation, etc., the overall cost of higher education can sometimes exceed what a family has saved. This gap where something is required to bridge the available funds versus the actual expenses is where education loans come to play as these help students follow their academic paths without compromise.
Here are some of the reasons why students take loans for higher studies.
Increasing Costs of Education: Many prestigious universities and even trendy professional courses have increased job-desired reputations that mount higher fees. A loan helps to fill the gap between what is saved versus what is paid out.
Opportunity to Take Education Overseas: Education abroad costs not just tuition, but living costs, travel, travel insurance, and schooling insurance. In effect, international education comes with significant expenses. A student then who wishes to take education overseas are able to access more options and pay for these items via loans.
Lessening Family Expense: What if the parents have been saving for their education and are paying the whole amount? With a loan, they have a choice to bear the expense of their education financially and independently of their parents or family expenses and of course, eventually, in payback for the loan.
Flexible Payment Process: With most education loans, students are afforded a moratorium period (holiday) which usually don’t start repayment until after study-related and investigating starting employment.
Best Career Opportunities: Education loans can provide pursuit opportunities that may best fit institutional or course related needs that may have had less cooperation without these loan abilities may lead to best campuses for related studies in their particular areas of interest and ability.
Government Subsidy & Tax Benefits: Interest subsidy schemes and income tax deductions under Section 80E make education loans more affordable compared to other financing options.
Pros and Cons of Education Loan
Education loans are the most widely used option for students intending to enroll in higher studies in India or abroad. Like all financial products, education loans have advantages and disadvantages.
Pros of Education Loan
- Designed for Students – It is meant for students, it will cover the tuition fee, hostel fee, books, travel and other education-related activities.
- Interest Rates – It is cheaper than personal loans, especially in subsidized education loans, and can get interest concessions for female students.
- Moratorium Period – Payment only starts one month after course is completed, and a moratorium period (6-12 months) prior to repayment.
- Loan Amounts – Banks can sanction up to Rs.1.5 crore (for overseas education) depending on the institution and course.
- Tax Benefits – Interest paid on educational loans are eligible for tax deduction under Section 80E of Income Tax Act.
- Government Schemes & Subsidies – Students from economically weaker section can avail interest subsidy schemes like CSIS.
- Nurtures Financial Discipline – It teaches students to take ownership of the costs related to their education and their credit history at an early age.
Cons of Education Loan
- Collateral Requirement – With loans above Rs.7.5 lakh, banks generally require collateral or a third-party guarantee.
- Lengthy Process – Loan approval can take some time, as banks will always want to verify admission, the course, and financial standing of co-applicants.
- Debt Burden After Studies – New entrants to the job market can feel pressure to start a lucrative career immediately so that they can start repayment, which can be a burden.
- Restricted Usage – Loan money can only be used for education-related expenses. Loan money cannot be used for personal expenses.
- Co-Applicant Dependence – Banks often make parents/guardians co-applicants which means the financial profile of your parents/guardians is as important as yours.
Pros and Cons of Personal Loan for Studies
Family and students are often likely to consider a personal loan when education loans take too long or are not an option. While they are relatively flexible, they have some limitations.
Pros of Personal Loan for your Study
- Flexibility of usage – Personal loans can be used to pay tuition fees, housing or living expenses, equipment or gadgets, travel abroad or to cover for other personal needs.
- Quick turnaround – Personal loans typically have quicker turnaround times than education loans, sometimes as quick as 24-48 hours.
- No collateral – Most personal loans are unsecured so you do not have to risk your home, car or other asset.
- Straightforward documentation – There is much less documentation than an education loan.
- Your academic proof of admission is not tied to your ability to use the loan – whereas you can have the money without acceptance letters or details on the course.
Cons of Personal Loan for Studies
- Higher Interest Rates – Typically more expensive than education loans, interest rates normally range from 11%–24%.
- Immediate Repayment – EMI commences right after disbursal as there is no moratorium period (like in education loans).
- Lower Loan Amount – Banks/NBFCs usually limit to Rs.20–25 lakh, which is generally less than total education expenses overseas.
- Shorter Tenure – Maximum repayment tenure is scheduled with expectation of 5–7 year terms, which result in higher EMIs.
- Credit Scores – Important to note that approval and interest rates depend heavily on the applicant’s (or co-applicant’s) credit history.
Which Loan Should You Choose?
When deciding between an Education Loan and a Personal Loan, consider your financial needs and situation.
- If you want the lowest interest rate, a long repayment time, and tax benefits, an Education loan is a much better option. This is a loan designated for students, and often supported by the government with moratoriums.
- If you need quick cash without all the documents, or want the flexibility of spending the money for more than the tuition fees (living expenses, gadgets, travel), then a Personal Loan can work for you although it is a much more expensive loan.
In most situations, students will be best served using an Education Loan for lower managed financing. A Personal Loan should only be considered when you have serious eligibility issues with obtaining an education loan or when unforeseen expenses arise.
FAQs: Education Loan vs Personal Loan for Studies
Q. Which loan is better for higher education – Education Loan or Personal Loan?
A. An Education Loan is generally better option because it has lower interest rates, longer repayment tenure and tax benefits. A Personal Loan is only a good option if you want a quick turn around for your funds or if you are unable to qualify for an Education Loan.
Q. Can I use a Personal Loan instead of an Education Loan for studies abroad?
A. Personal Loan might not cover the total cost of overseas education as the amount is generally restricted to a ceiling and the interest rate would also be higher compared to education loan.
Q. What expenses does an Education Loan cover?
A. Education Loans cover tuition fees, hostel fees, books, exam fees, travel expenses (for studying abroad), and sometimes the equipment necessary for the course (like laptops).
Q. What expenses can I use a Personal Loan for in education?
A. A Personal Loan has no restrictions. You can use it for tuition fees, living costs, gadgets, travel, or any other need related to your studies.
Q. Which loan has easier eligibility – Education Loan or Personal Loan?
A. Education Loans require you to have admission in a recognized institute of education and mostly a co-applicant. Personal Loans depend mainly on your income, credit score and repayment capacity, so if you are working professionals the eligibility might be easier for Personal Loans.
Q. Do Education Loans offer any tax benefits?
A. As per Section 80E of the Income Tax Act, the interest paid on Education Loans is tax-deductible for a maximum of eight years. Personal loans do not have any tax benefits.
Q. Which loan is faster to get – Education Loan or Personal Loan?
A. Generally Personal Loans are disbursed in faster time frames, usually in a few days. Education Loans need to be documented and verify your documentation, so can take longer than the normal standard.
Q. Which loan has a moratorium period?
A. Education Loans usually have a moratorium period (course duration + 6-12 months) where you do not have to pay the principal amount. There is no moratorium period on Personal Loans. Once a Personal Loan is sanctioned the repayment starts immediately.