Why it is better to take an education loan than invest your savings in your children’s education?

When it comes to financing higher education there is always a dilemma of either using parents’ savings or taking out an education loan. While using personal savings keeps you away from the worry of paying it back, it comes along with the burden of emptying out the retirement savings of your parents. 

In such a situation it is always better to go out for an education loan as these are low-cost loans that charge you around 7-12 per cent interest along with the unlimited tax benefit on interest deduction. Moreover, instead of using personal funds for educational expenses, the optimal way is to apply for low-cost loans from a lender and invest funds where they can get better returns. 

“Students are generally discouraged from using personal funds, contingency funds, or retirement funds of their parents. These funds can be used better if invested in schemes with higher returns. However, students often rely on personal funds to finance a part of their education costs to reduce their dependence on education loans,” says Ankit Mehra, CEO, and Co-founder of GyanDhan.

Mehra adds: “For example, if I have Rs 30 lakh, and based on my past investment experience, I can get a 12 per cent return, it makes more sense to invest Rs 30 lakh, and borrow Rs 30 lakh from a lender at an effective interest rate of 6.3 per cent. Consequently, if not thought through properly, not taking an education loan can become an enduring burden."

Similarly, students, who get placed at a good company with a bumper signing bonus, are usually in a hurry to close the loan without evaluating their options. According to their financial capacity, students are advised to check whether keeping the loan going and investing the signing amount elsewhere for better return makes sense or not.