When you are planning to study abroad, arranging funds and financing your education is the first step that is involved in the process. Most parents save their years of earnings just for their children's education, while others rely upon student loans.

But the confusion often lies in which is a better option. Student loans or self-funding? In this blog, we will break down which is the better option for students and why. 

What is Self-Funding?

Self-funding is nothing but paying all your education expenses using your own or your family’s financial resources. This does not include any external help such as loans, sponsorships, etc.

Self-Funding Consists of:

  • Personal savings

  • Fixed deposits 

  • Insurance policies

  • Amount received after selling a property, land, or gold

  • Borrowings from close relatives, friends, etc.

Self-funding can be debt-free and straightforward, but not everyone is sustainable enough to fund their education through self-funding, especially from the middle-class income groups.

How to plan your way through college by self-funding your education?

For students who are planning to study abroad, it’s very necessary to arrange their finances accordingly, as it will help them save a lot of time and distress in the future. A student should also plan for their financial emergencies that may occur during the duration of their course. 

    1. Hunt for scholarships and grants
      Hunt for various scholarships or grants, as they act as a helping hand when you are self-funding your education. This will overall assist you to fund your overseas education and also benefit your higher education course abroad. 
    2. Search for a part-time job.
      Opting for a part-time job while studying will help you progress professionally as well as financially. You may avail of an opportunity where you can work on your skillset as well as manage your living expenses abroad. This way, you would not have any financial baggage on your head while studying abroad. 

Student Loans for study abroad

Education Loans are designed to help students fund their higher education abroad. These loans cover students' tuition fees, living, travel, and other miscellaneous and other education-related expenses.

Types of Education Loans

There are two types of loans:

  1. Collateral loan or secured loan
  • Loans that are provided based on collateral security are known as secured or collateral loans. The borrower is required to pledge collateral as security against the loan amount. 
  • Assets such as House, Flat, Non-agricultural land, Fixed deposits, Insurance Policies, Government, etc, are used to pledge against the loan amount as collateral.
  • These loans usually come with lower interest rates, higher loan amounts.
  • Many public, private banks, and NBFCs offer these loans.

2. Non-collateral loan or unsecured loan

  • Loans that do not require pledging of any collateral are known as non-collateral or unsecured loans.
  • In this, the borrower does not have to pledge any security to obtain a loan. Students who have inadequate assets to pledge security can go for an unsecured loan.
  • However, while opting for unsecured loans, factors like parents' income, university ranking, and fee, etc, are considered. 
  • These loans are offered at slightly higher interest rates than the collateral loans, with a limited loan amount, but quicker loan approval

Self-Funding Vs Student Loans: Which one is better?

As we previously discussed, students and parents are often confused about choosing the right type of funding for their education abroad.

  1. Saves your Family's Income
  • When you fund your education abroad with your own savings, you might end up spending all your savings, selling valuable assets like gold, FDs, Insurance, property, etc.
  • But if you take an education loan, you can keep all your savings safe and gradually repay your education loan after you complete your studies. This can also help your family use their savings during emergencies

2. Financial benefits

  • When you are self-funding your education overseas, you cannot get any financial benefits that you would get with an education loan.
  • But when you avail of an education loan, this is one of the biggest benefits of an education loan, such as lower interest rates, flexible repayment policies, repayment holidays for students, Government subsidies, etc

3.Proof of funds to secure admission

  • When you self-fund your education, the universities usually ask for a solvency letter to get admission confirmation. Students are required to demonstrate their financial capacity to the university by displaying approximately 1 year plus 50% extra funds in their account.
  • on the other hand, when you take an education loan, your bank, which sanctioned your loan, will offer a solvency letter to display proof of funds. 

If you apply via WeMakeScholars for an education loan, our financial officers will assist you to get the sanction before admission confirmation, and this will give you time to display funds in your bank account. 

4. Moratorium period

  • When you are borrowing an education loan from Government banks, the biggest advantage you get is a moratorium period.
  • The moratorium period is a loan repayment holiday where you are not obliged to pay money to the bank for a certain period, i.e., the course duration plus 6 months/1 year.
  • Students also get the opportunity to extend their repayment tenure up to 15 years when they borrow an education loan from Government Banks
  • whereas when you self-fund your education, you cannot avail this advantage.

5. Arrangement of large funds in a short period

  • You have to plan for years and save money for your education when you self-fund your higher education. This is the main con of self-funding education, as you might be required to arrange large funds in a short period, which is near impossible in most cases.
  • whereas, when you avail of an education loan, the bank disburses the required amount intermittently. So, in case the student has to arrange large funds in a short period, the student can arrange the money by demanding more loans for their education against their collateral value. 

6. Multiple expenses are covered.

  • When studying abroad, managing expenses like house rent, fees, food, etc, is difficult when you self-fund your education.
  • on the otherhand,when you take an education loan, all your essential expenses like rent, food, laptop, etc, are all covered in the loan amount.

7. Fluctuation in currency rates

  • With the rising inflation, whenever there's a change in the currency rates, the cost of education also fluctuates, due to which students who are self-funding their education may feel strenuous.
  • while your sanctioned education cannot be affected with these changes,and can be quite beneficial at this moment.

8. Tax benefits- Section 80E

  • Under Section 80E of the Income Tax of 1961, the students pursuing higher studies in India or abroad can claim a deduction.
  •  i.e. the interest that you pay on the educational loan can be claimed as a deduction.
  • whereas with self funding you will not be eligible for any tax deductions.

9. Build your CIBIL score

  • CIBIL is the factual summary of your past and present borrowings. When you self-fund your education, you cannot construct your CIBIL score, as it requires timely repayment of EMIs.
  • whereas when you avail of an education loan, you can build your CIBIL score by making sure of the timely repayment of the loan through EMIs.

10.Opportunity for students to take responsibility

  • Self-funding involves the help of parents, relatives, and friends, whereas when you take an education loan, the student will be responsible for paying his/her loan amount after the completion of their course.
  •  This willnreduce the burden of parents, as the student would be responsible for repaying the debt. This will encourage them to build their career also.

11. Benefit of Tax on Foreign Remittance

  • The Union Budget levies 5% TCS on overseas remittances according to Section 206C for people who are flying overseas. So, students who are self-funding their education have to bear 5% TCS on overseas remittances, whereas if you take the support of an education loan, there will be no TCS on remittances supported by financial institutions for study abroad, even on the payments above Rs 10 Lakhs. 

Conclusion

In conclusion, student loans outweigh self-funding for studying abroad due to key advantages. They provide financial flexibility by spreading costs over time, unlike self-funding's immediate and limiting nature. Student loans also offer investment opportunities, aid in building credit, and feature lower interest rates, preserving personal savings and offering manageable repayment structures. With Tax benefits and structured repayment plans, student loans provide ease in managing student finances, making them a more beneficial choice for funding education abroad.

If you are facing any issues related to education loans, you can request a callback on our website, and our financial officers will assist you in solving all your queries related to education loans. 

Note: WeMakeScholars is an organization funded and supported by the Government of India and is associated with 10+ public/private banks/ NBFCs in India. We have helped millions of students by connecting them with the best education loan lenders across India. We have a dedicated financial team to assist you with any education loan-related query. As we are Government funded, there is NO FEE charged for the services offered.