Should you Depend on an Education Loan to Fund your Child's Dreams?

2024-08-02

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Organizations are now looking for “employable” people rather than graduates with mere shiny degrees and polished resumes. Universities around the world are gearing up to keep up the pace to churn out skilled talent that can hit the ground running from day one.

With a rapidly changing market landscape, companies want quick results, employees are staring at shorter stints and gig seems to be the order of the day. The writing on the wall is clear. Students have to be “industry-ready”.

Institutions have come up with interesting flavours to add to their plain-vanilla degrees so that hiring managers recruit from their campuses. Some offer industry-capstone projects, whereas others send students on international immersions. Others focus on internships in parallel to coursework-all this to keep students in sync with the real world. But the bottom line-cost overheads shoot through the roof and the coveted degree becomes costlier. Can a child insurance plan cover the cost of education so that your kid can achieve all their dreams?

How Much does a Good Education Cost?

Quality education comes at a cost, even at institutions promoted by the Government of India. IITs and IIMs were initially fully funded through the public exchequer. However, the institutions are now increasingly becoming autonomous and self-financed to reduce any dependency on public funds.

For example, a 4-year BTech course at one of the premium engineering institutions costs a minimum of Rs.12 -15 Lakhs whereas if you opt for a privately owned premium institutions, you will have to pay up approximately Rs. 25 Lakhs. MBA programs at the top B-Schools in India cost between Rs. 12 to Rs. 25 Lakhs.

Inflation in Higher Education

10 to 15 years from now, these institutions might as well charge anywhere between Rs 20 and 40 Lakhs for similar graduate and postgraduate programs. Reason? Inflation.

Higher education inflation in India is one of the highest in the world. The cost of a graduate program will more than double in 10 years.

Saving for Higher Education with Child Education

So, how do you draw out the best child education plan so that you give the best possible education without straining your finances? Look at the Guaranteed Savings Plan (GSP) offered by Canara HSBC Life Insurance.

For example, if you plan to start investing Rs. 1.65 lakhs each year for just 10 years at the age of 30, you can expect to receive approximately Rs. 30 lakhs at the end of 15 years. While you will invest in the plan for only 10 years, your money will continue to grow for another five years before maturity.

The icing on the cake, Rs. 1.5 lakhs invested each year is deductible from your taxable income under section 80C of the Indian Income Tax Act.

You will end up saving another Rs. 42,000, payable in taxes, every year (if you fall in the highest tax bracket).

A quick comparison of the Guaranteed Savings Plan with an education loan will help understand the direct and indirect benefits of starting early:

	Education Loan	Guaranteed Savings Plan
Amount Spent on Education	Rs. 30 Lakhs	Rs. 30 Lakhs
Amount Spent on Interest	Rs. 17.5 Lakhs	0
Amount Saved in Taxes (30% Tax)	Rs. 5 Lakhs	Rs. 4.2 Lakhs
Net Amount Spent on Education	Rs. 42.5 Lakhs	Rs. 25.8 Lakhs

This is a clear benefit of planning and saving for your child’s higher education goal, rather than borrowing for it. You may also apply similar logic to other goals and purchases in life.

How will an Education Loan work?

Education loans are a good alternative to funding your child’s education. If you look at it, if you can secure an adequate education loan for your child, you can not only fund the education but also enjoy some additional tax rebate under section 80E.

However, education loans, like any other debt, have their limitations:

Need for Collateral
The first idea that flashes across your mind when you think of college fees-Education Loans. But did you know that Banks and financial institutions are very conservative when approving education loans? To avail of a loan of Rs. 50 Lakhs, you must submit collateral worth at least Rs. 70 lakhs.

If your property is already under hypothecation and you are paying your home loan, this may not be eligible for showing as collateral.
Collateral Free Loans Not Enough & Costly
As per banking regulations, loans without collateral can be disbursed only for amounts up to Rs. 4 Lakhs. This amount will not suffice to complete a professional course at most of the top-tier institutions.

Also, unsecured loans do not enjoy the lower rate of interest as secured loans. So, it will also be costlier for you.
Real Cost of Education After the Loan
Even if you do provide collateral and manage to get an education loan of Rs. 30 lakhs repayable over a 10-year tenure, you must do a quick back-of-the-envelope calculation of the total “cost” of the loan. The interest payable is the cost that you pay for the loan.

At 10% interest, you will have to pay approximately Rs. 18 lakhs on a loan of Rs. 30 lakhs, i.e., a total of Rs. 48 lakhs.
No Safety for Your Child
If under an unfortunate spell of events you are lost to the family, an education loan can leave your family without an asset or with a large financial burden.

The most visible feature of an education loan is the tax benefit under section 80E of the Indian Income Tax Act. The interest component can be deducted from the taxable income.

For example, if you fall in the 30% tax bucket, you will save about Rs. 90,000 (30% of the interest paid on the education loan) in taxes in the first year. (assuming a loan of Rs. 30 Lakhs at a rate of interest of 10% for 10 years)

But you end up paying approximately Rs. 3 lakhs to get this benefit. In 10 years, you will pay a total of close to Rs. 17.5 lakhs as interest on this loan, while saving about 30% of this amount in taxes each year.

This implies your total outflow over the cost of education will be about Rs. 12 lakhs on a loan of Rs. 30 lakhs.

However, instead of using the loan to fund the entire cost of higher education for your child, you can aim to use this option only as a last resort. You should only use an education loan to fill the gap in your savings for the goal and the actual cost.

It would be much more affordable and fulfilling to have an adequate corpus for higher studies. But just in case you fall short, the option of borrowing would always be there.

Protect the Dreams of your Child with a Savings Plan

Investment in insurance policies gives 360-degree benefits that include return on investment, insurance cover, and tax deduction/exemption. In addition to this, you get a life cover that gives you peace of mind because the policy will ensure your family goes ahead with the education plan even if, unfortunately, you are not around.

Both Invest 4G and Guaranteed Savings Plan offer the feature to secure your child’s goal from your early demise. If you use this option, the insurer will invest the remaining premiums in the policy and provide your child with the maturity value after your death.

Considering the increase in costs of quality education, the challenges and costs of availing education loans, investments in insurance policies will not only help fund education but also result in significant savings.

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