Should I get an educational loan or Fund the education of my children through my own funds?
This question is faced by many parents as more children are going abroad or going to premium institutes in India for higher education where the fees are substantial.
Now to address this question you have to compare both the options i.e. paying through own funds vs funding though a loan from subjective and objective angles .
Parents have certain beliefs around money which get reflected in their decision making, such as loans are bad or below dignity.
I SHOULD provide everything for my children or some parents have different beliefs like my children should be self-sufficient or they should take care of their education.
Depending upon these beliefs their decision regarding loans or own funds is directed.
Sometimes some parents have no option but to take out loans because of financial limitations.
Let’s take a case where parents have their own funds available and they have to decide whether to take an education loan or use their own funds.
Cost of Borrowing –
It’s nothing but the rate of interest for your loan. It is important to check the opportunity cost VS Education Loan interest.
Currently Education Loans are available at 9 to 9.5 %
For Education of girl child there is a discount of .50%
So you can consider the options to see whether you can choose an investment opportunity where you can grow your money higher than the educational loan interest .
Tax Benefit –
Individuals applying for an education loan for themselves, their children, or their spouse get tax benefits under Section 80E of the Income Tax Act. The unlimited deduction is available on the interest component of the loan thereby reducing the cost of borrowing.
So considering these points if the decision about funding your child’s higher education is taken then it can helpful.