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Student loans vs Self-funding: Which is Better?

Student loans vs Self-funding: Which is Better?

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Know the difference between student loans and self-funding for higher education abroad. Understand the pros and cons of both and compare them to choose the best way to finance your studies.

Education loan
GyanDhan
vishakha Bhagia
Updated on:  01 Nov 2024  | Reviewed By:  Aman  | 9.71K | 10  min read

Planning to study abroad, securing funding, and figuring out how to pay for education are all important considerations. In many cases, students do not even dream of studying abroad due to financial constraints. Most parents consider self-financing as a realistic alternative for funding their child's education by liquidating valuable assets or arranging funds through family friends and relatives, but such financial aid is not available to all families. This is where a student loan can help. Taking an education loan can be a financial relief for most students. This blog provides a brief overview of the advantages of student loans and their preference over self-funding.

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What is Self-Funding?

Simply put self funding means paying for your education and living expenses without using external loans or sponsorship. It usually entails using personal or family savings, investments, or other financial resources to cover tuition, housing, travel, and other expenses associated with studying abroad. 

Factors to Consider While Self-Funding your Education:

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    Financial plan: Students should arrange their money carefully, to save future troubles during the study. They should be prepared for any financial difficulties that may arise throughout the course of their studies.
 
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    Scholarships and grants: assist students in paying for their abroad studies while also enhancing their higher education opportunities.
 
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    Part-time work: helps students advance professionally and financially. This improves their talents while managing living expenditures while overseas.

 

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What are Education Loans?

When students don't have enough money to pay for living expenses and tuition fees for a course abroad, they turn to an education loan. Education loans are financial aids for students who lack funds to pursue their education in home or abroad. Traditional resources, such as borrowing money from relatives and friends, have become prohibitively expensive, making it nearly difficult to support complete quality education with years of savings.

Types of Education Loans:

There are two types of education loans to study abroad, education loans with collateral and education loan without collateral.

 

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    Secured Education Loans - These loans require the borrower to pledges collateral to get a loan, in such scenarios the lender is guaranteed. Public banks are the best option for secured education loans.
 
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    Unsecured Education loans - These loans do not need the pledging of any collateral. Instead borrowers need a co-applicant, someone with a decent CIBIL score and monthly income. However, when considering unsecured loans, factors such as co-applicant's income, university ranking, and course are considered.
 
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Which is Better: Self-Funding or Student Loans?

Factors Self-Funding Student Loans

Financial burden

Entails liquidating all savings and precious assets such as gold, FDs, insurance, a flat, land, and so on.

Allows you to save money and collateral by repaying the loan on time.
Benefit: the saved money can be used in the event of a family emergency.

Monetary advantages

Not Available

Lower interest rates, more flexible repayment rules, a repayment vacation for students, and government subsidies.

Proof of funds

The university wants a solvency letter in order to confirm acceptance. Students must demonstrate their payment capability to the university by exhibiting approximately one year's worth of cash plus 50% extra in their account

The bank provides a solvency letter as proof of finances.

Moratorium period:

A loan repayment holiday during which students are not required to pay money to the bank for a set amount of time, such as the course term + 6 months/1 year.

Not Available

Students taking an education loan from a government bank can prolong their payback period up to 15 years

Arrangement of large funds

Students / their parents must plan and save money for years. Or they may need to arrange large sums of money in a short period of time, which is nearly impossible in most situations

The bank disburses the appropriate amounts on a regular basis. If a student needs to raise a significant sum of money in a short period of time, the student can do so by requesting a larger loan for their education against their collateral value.

Coverage of multiple expenses

Managing additional expenses such as house rent, fees, food, and so on is challenging

All important expenses such as rent, food, laptop, and so on are all included in the loan amount.

Currency rate fluctuations

With rising inflation, the cost of education fluctuates with changes in currency rates, making students feel strained

Education loans are not affected by these fluctuations.

Benefits under Section 80 E of the Internal Revenue Code

Not applicable

Allows deduction in Rate of Interest for abroad studies.

CIBIL score:
CIBIL is a summary of the credit history up to that point.Opportunity for students to take responsibility

Cannot be built because timely EMI payments are required.Involves the help of parents, relatives, and friends

Can be built by ensuring timely repayment of the loan amount through EMIs.Parents' responsibilities will be relieved because the student will be accountable for repaying the debt.
Benefit: motivates them to advance in their careers.

Tax Benefits on International Remittances: According to Section 206C, the Union Budget for 2020-2021 seeks to charge a 5% TCS on foreign remittances for those flying overseas.

Students must pay 5% TCS on overseas remittances,

TCS on remittances backed by financial institutions for study abroad is kept at 0.5% on payments over Rs 7 lakhs.

 

 

In most circumstances, it is recommended that students take out an education loan rather than self-funding because education loans come with additional benefits. Students are finding it difficult to secure funding to continue their studies due to rising prices. This is an excellent opportunity to take out an education loan, particularly during the pandemic in which the country's economy has been severely harmed and students are struggling to pay for their education.

 

If you are also looking for an abroad education loan, you can get in touch with GyanDhan for free expert assistance in getting the loan. To start, you can check your loan eligibility now!

 

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Frequently Asked Questions

Is it advisable to take an education loan for studying abroad?
 

Yes, taking out an education loan can be beneficial because it allows you to manage your finances without depleting your personal savings, and it often comes with favourable repayment terms and interest rates tailored to students.

Which is better: a personal loan or an education loan?
 

When it comes to studying overseas, an education loan is usually preferable to a personal loan because it has longer repayment terms, lower interest rates, and tax advantages.

Is it better to take an education loan or use savings?
 

It is based upon your financial circumstances. Education loans protect emergency savings and offer tax advantages, whereas using savings results in no debt but may leave little money for unanticipated expenses.

Can I take a personal loan and go abroad for my studies?
 

Yes, you can, but it is less desirable. Personal loans have higher interest rates, shorter repayment periods, and may not offer deferment options, making them more expensive and difficult to manage while studying.

What are the benefits of an education loan over a personal loan?
 

Education loans have lower interest rates, flexible repayment terms, deferment periods during studies, and tax breaks, making them a more student-friendly option than personal loans.

Is taking an education loan risky?
 

As with any loan, there is some risk, especially if post-graduation employment is uncertain. However, education loans typically have longer repayment periods and moratoriums, which reduces the burden as you establish your career.

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