Rising costs have made funding children's education a crucial decision for many families. According to EduFund research, tuition fees for some management courses have surged by 75-147 percent, with costs now averaging between Rs 15 and 25 lakh, compared to Rs 8-17 lakh in 2013.
In cities like Mumbai and Pune, the average fee for engineering courses have increased by 70 percent over the last decade, and the total cost of medical studies can reach as high as Rs 1 crore. Factors like privatisation, increased demand, minimal regulation, and limited seats in government colleges contribute to the steady rise in education expenses.
With education inflation around 10 percent-11 percent, these costs are expected to double within the next 6-8 years.
Given this steep trajectory, planning carefully for education funding has become more important than ever.
Traditionally, Indians are diligent savers but lack strong investment habits. Savings often stayed in cash or traditional assets like fixed deposits or gold.
However, this is changing as more people now invest in financial assets like mutual funds, which can outpace education inflation and offer real returns.
On the other hand, demand for education loans has also risen significantly. According to the data cited in Parliament from the Indian Banks Association (IBA), fresh loan applications grew by over 71 percent from 3,22,163 in 2019-20 to 5,50,993 in 2023-24.
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Savings vs borrowing for education fees
Apart from rising tuition costs, tax benefits may be driving this demand for education loans. Under Section 80E of the Income-Tax (I-T) Act, 1961, you can claim deduction on the interest paid for education loans taken for the higher education of yourself, your spouse, or your children.
So, which is the better choice to fund your child’s education? Investing or taking an education loan?
Let's consider a hypothetical example. Suppose you need to pay a tuition fee of Rs 10 lakh. You have two options:
- An education loan of Rs 10 lakh at 10 percent interest rate or
- Cover the tuition fees using your savings
If you go for a loan, you forgo the potential 10 percent return from investment. When you choose a loan, the effective cost of borrowing is the interest paid minus any tax savings.
In contrast, if you use savings, the opportunity cost is the return you miss by not investing the funds. For simplicity, let’s assume a loan tenure of one year. Here's how it will stack up:
| Option 1 - 100% education loan (Rs) | Option 2 – 100% savings (Rs) | |
| Education cost | 10,00,000 | 10,00,000 |
| Time period (in years)* | 1 | 1 |
| Interest rate on education loan/potential return on Investment | 10% | 10% |
| Equated monthly installment (EMI) | 87,916 | NA |
| Total repayment amount | 10,54,991 | NA |
| Interest on education loan | 54,991 | NA |
| Return lost on investment^ | NA | 1,00,000 |
| Cost before tax | 54,991 | 1,00,000 |
| Tax benefit on education loan (assuming slab rate of 30 percent - under the old regime) | (16,497) | NA |
| Total cost after tax | 38,493 | 1,00,000 |
| Overall cost as a % | 3.85% | 10% |
As shown in the example, the after-tax cost of borrowing is significantly lower than the cost of using savings. The lower interest rate, combined with tax benefits, make the loan option more attractive than investments.
In reality, the appeal of an education loan is further enhanced by factors like:
- Availability of a moratorium period
- Access to borrowed funds over a longer duration
- The potential for higher returns from investments, and
- The tax benefits associated with education loans.
From a financial perspective, these factors make an education loan a compelling option.
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Dealing with the debt burden
Psychological factors also play a significant role. Borrowing funds and repayment commitment can feel like a burden on parents, and the regular EMI payments can limit financial flexibility. This is why a balanced approach may be more suitable.
Instead of relying solely on an education loan or just savings, combining both options can offer a middle ground. For example, in the scenario above, if you used 50 percent from an education loan and 50 percent from savings, your EMI would be Rs 43,958, with a total repayment of Rs 5,27,495, leading to a total cost of 6.92 percent.
The ideal split between an education loan and savings will depend on each individual’s financial situation and comfort level.
Another factor to consider is that the availability of an education loan at a low interest rate when it’s time to pay is not guaranteed. Therefore, it's wise to start saving and investing early to build a sufficient corpus. When the time comes to make the actual payment, you can then assess whether taking an education loan is more beneficial.
In summary, funding education deserves as much careful planning as education itself. While Benjamin Franklin famously said, “An investment in knowledge pays the best interest,” it’s essential to consider the financial implications of how we fund that investment.
The writer is co-founder at EduFund.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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