Should you take a loan to finance higher studies?

Jan 2023

2 mins read

Higher education can ignite your career, help you start a venture of your own and enhance your knowledge. However, to attend the best institutions for higher studies, you need a substantial amount of money. Given the rising cost of education, you might wonder, should you take a loan to finance your higher studies?

Self-Funding vs. Financing

The traditional outlook of Indians towards financing has been apprehensive. If you ask someone from an older generation, they would recommend not taking a loan unless there is no alternative. But avoiding a loan could be a lost opportunity, as borrowing would free up funds for you in the short term. You could have invested that money in a wealth-generating avenue, or retained it for liquidity. If you can get financing at a reasonable cost along with other benefits, it may be better for you to take it.

In case of higher studies, self-funding is risky because at your age and stage of life, you might not be able to afford the entire amount yourself. Self-funding may then involve borrowing from your parents, or from friends and family. Family savings such as gold, fixed deposits and land would have to be liquidated and invested here. It’s risky putting all your eggs in one basket like this. If all your assets go into financing higher studies, you have nothing to tide you over, say, a medical emergency. Besides, self-funding would need years and years of planning and saving ahead, which might not always be possible if you need to study abroad soon.

With many banks and Non-Banking Financial Companies (NBFCs) offering easy access to education loans, it may be ideal to bear some costs, e.g. out-of-pocket expenses, from your savings, and pay the bulk of tuition fees and other costs through loans.

Financing higher studies in India

Your need for financing depends partly on where you want to pursue your further studies. If your institution is in India itself, the cost of education goes down. It could go down even further if the institution is government-run. You should factor in the placement record of the institution, your job prospects such as average salary, and the number of jobs available in your domain, when applying.

Financing higher studies abroad

If you're looking to pursue a course outside India, you may need financing. There are a few factors to consider. Visa regulations in foreign countries often restrict employment opportunities for foreign students. It may not be wise to finance your higher studies in a country where you may not be able to gain employment. Another factor that can impact your loan, especially repayment, is the external changes in currency. Your loan will become even more expensive if the rupee drops in value against your host country’s currency. Also consider factors like scholarships and grants, availability of part-time employment etc. which could all affect your need for financing.

Managing your loan

Financing higher studies calls for long-term financial planning. Try to plan 3-5 years ahead, so that you don’t have to make last-minute arrangements in haste. If you do avail of finance for your higher studies, start paying your EMIs as soon as you get a job. You can avail of tax benefits under Section 80E of the Income Tax Act, wherein your taxable income will be reduced by the interest component of your EMIs. As your paying capacity increases, gradually keep increasing your EMI amount so that your loan burden reduces over time.

Wealth generation is crucial to help you keep up, as savings might not be enough, especially if you live in an expensive metro. It might be prudent to start investing in alternative sources such as mutual funds. This would give you an option of going for a co-pay arrangement. You could pay a part of the fees, say 20%, from your designated savings, and the rest could be taken as a loan. You could also take a loan for the whole fee amount. This way, you can use your wealth to take care of a lot of out-of-pocket expenses related to relocation, such as transportation and cost of living.

Pursuing further studies can give you a leg up in your life and career - but before you take this step, do the calculation for yourself to assess whether you need financing for it. Taking a loan might seem daunting, but it can also buy you time and the financial breathing space to focus on your education and yield rewards in the long run.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

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