Student Loans or Self-Funding: The better option

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

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

Key Highlights

• Learn about self-funding your education abroad
• What are education loans?
• Which is the better option?
• Get expert tips

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. 

A Brief Comparison of the self-funding and student loans

Parameter	Education Loans	Self Funding
Financial Flexibility	Yes, with interest	None
Repayment	Starts after course completion (moratorium period)	No repayment, but no funds left for emergencies
Tax Benefits	Interest paid is tax-deductible under Section 80E	No tax advantages
Credit Score	Builds a strong credit history for future loans	No impact on credit profile
Financial Planning	Allows structured repayment over time	Reduces liquidity and future investment potential
Emergency Funds	Savings remain untouched for unexpected emergencies	Limited or no funds left after education payment
Loan Assistance & Support	Government and banks offer subsidized interest and flexible terms	The entire burden falls on personal savings

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.

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.

Zero TCS (Tax Collected at Source) on Education Loans

• Any remittance made for education that is funded through an education loan from a financial institution specified under Section 80E is completely exempt from TCS. In other words, no TCS will apply to the transferred amount, no matter how large it is.
• On the other hand, if you are self-funding your education abroad, TCS (Tax Collected at Source) will apply under the Liberalised Remittance Scheme (LRS).

Here’s how it works (as per current rules):

If you are funding through your own savings (self-funding):

• • Up to ₹7 lakh per financial year: No TCS.

  • Above ₹7 lakh: A 5% TCS is applicable on the amount exceeding ₹7 lakh.

 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. 

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 other hand, when you take an education loan, all your essential expenses like rent, food, laptop, etc, are all covered in the loan amount.

Tax benefits- Section 80E

• Under Section 80E of the Income Tax of 1961, 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.

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 find it strenuous.
• While your sanctioned education cannot be affected by these changes, and can be quite beneficial at this moment.

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.

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.

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. 

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.

Expert Tips

Most students prefer education loans, even if they can afford them. The smartest way to fund your study abroad dream is to use a mix of savings and education loans. Your savings can cover small or immediate costs like flight tickets, visa fees, or initial living expenses.

However, for bigger expenses such as tuition fees and accommodation, it’s better to use an education loan. This way:

• You keep your family’s savings safe for emergencies.

• You enjoy tax benefits under Section 80E.

• You build a good credit history for the future.

Using a loan for the larger share of your expenses gives you financial flexibility without putting pressure on your family.

Conclusion

Funding your study abroad journey doesn’t have to be stressful. While some students use personal savings, most students prefer education loans, even if they can afford the expenses, because loans offer flexibility, preserve savings, and provide tax benefits.

The best approach is to use a mix of both, with loans covering major expenses like tuition and accommodation, and savings handling smaller costs or emergencies.

By planning carefully and borrowing wisely, you can focus on your studies, gain international exposure, and build a strong foundation for your future, without letting money stand in the way of your dreams.