The increasing costs associated with children’s education have become a significant factor for many families when considering funding options. In the realm of funding higher education, individuals often face the decision between utilising parental savings or obtaining an educational loan. Opting for personal savings can alleviate the concern of repayment but may entail depleting the retirement funds of one’s parents.
According to data from the Reserve Bank of India (RBI), the total outstanding education loans in both public and private banks reached Rs 1.31 lakh crore by the end of November 2024, marking a 17% increase from November 2023. Bank-issued education loans have maintained an 8% compound annual growth rate (CAGR) from 2015 to 2024. However, in 2018, there was a 3% decrease in outstanding loans due to a slowdown in the global economy. The growth remained stagnant during the challenging years of 2020 and 2021 amidst the Covid pandemic.
According to a report by Crisil Ratings last year, the demand for education loans, particularly for courses abroad, is expected to continue growing rapidly. Non-banking financial companies (NBFCs) are set to see substantial growth in this segment, with their assets under management projected to exceed Rs 60,000 crore this fiscal year, representing a 40-45 percent increase.
Following impressive growth rates of over 80 percent in fiscal year 2023 and 70 percent in fiscal year 2024, NBFCs’ education loan assets under management (AUM) reached Rs 43,000 crore as of March 31, 2024.
Education Loan vs savings
When considering how to finance higher education, individuals often face a decision between tapping into their parents’ savings or opting for an education loan. While using personal savings may alleviate concerns about repayment, it may also deplete parents’ retirement funds.
In such circumstances, it is advisable to explore education loans as a viable option. These loans typically offer lower interest rates, ranging from 7-12 per cent, and provide the added advantage of unlimited tax benefits on interest deductions. Rather than exhausting personal resources for educational expenses, it is more prudent to seek out low-cost loans from a reputable lender and allocate funds towards investments with higher returns.
On the other hand, when considering borrowing funds for education and the commitment to repay them, parents may feel burdened by the financial responsibility. The regular EMI payments can restrict financial flexibility. To alleviate these concerns, a balanced approach that combines education loans and savings may be more appropriate, offering a middle ground solution.
“Choosing between an education loan and a savings fund for your child’s education depends on multiple factors—your time horizon, study destination, investment strategy, and overall financial health. If you have ample time, investing in a diversified portfolio, including international funds for overseas education, can help mitigate currency risks and inflation. However, if college is around the corner, an education loan may be necessary, especially if interest rates are favorable and tax benefits apply. Balancing education funding with retirement planning, exploring scholarships, and understanding tax implications are equally crucial. The right approach is a well-planned mix of savings, investments, and strategic borrowing, ensuring your child’s aspirations are met without compromising your financial security,” said Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance.