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Education Loan vs Education Plan

Every parent wants to secure the future for their children, and one of the most important ways to do this is by giving them quality education. The issue of how to effectively finance their child's education is one that many parents in India are confronted with due to the escalating prices of education. Education plans and loans are two common choices. Although they both seek to help people financially, they serve distinct purposes and have different advantages. Selecting the best course of action can affect both your financial security and the future of your child in the long run.

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Education Loan vs. Education Plan

Education Loan vs. Education Plan: Secure Your Child's Future

Education Loan vs. Education Plan
September 11, 2024

Table of Content

 

This article delves into the details of education loan vs. education plan, highlighting their key differences, benefits, and drawbacks, to help you make an informed decision. By understanding these financial tools, you can take proactive steps to secure a bright and successful future for your child, without compromising your financial health.

What is the difference between an Education Loan and an Educational Plan?

Although they both work differently and serve distinct goals, education loans and education plans are financial tools intended to fund educational aspirations. A bank or other financial organisation will provide students or their parents with an education loan, which is a type of debt that must be paid back over a certain period with interest. In contrast, parents can utilise an education plan, which is a kind of investment-complimentary insurance policy, to invest and methodically save money for their child's future educational costs.

To understand education plan vs education loan in detail, read the section below:

  • One Time Use

    • Education Loan: The main use of a loan is to cover one-time costs like living expenses, hostel lodging, or tuition. It is therefore a good choice for short-term financial requirements. You are paid in full upfront when you take out an education loan to pay for these costs. That also implies that you will have a certain amount of time to return the full loan amount plus interest.

    Education Plan: On the contrary, an education plan is a long-term investment instrument intended to build up capital over time. It doesn't give you a big payment right away. Rather, you pay the premiums every month, and when the policy matures, you may use the collected money to pay for your education. Because you may modify your premium payments or withdraw the money gradually as needed, this gives you greater freedom.

  • The Impact on Your Child

    • Education Loan: Even though an education loan might help you out financially right away, it can also put your child in debt. The total cost of schooling may rise considerably due to the interest accumulated on the loan. Your child's financial independence and capacity to make important life decisions, like purchasing a home or launching a business, may be hampered by this debt.

    Education Plan: Since an education plan keeps your child out of debt, it may be a more economical choice. If you start early, you may save up a sizable amount to pay for your school without having to pay interest. Your child may benefit from increased financial flexibility and peace of mind as a result. An education plan can also help your child learn financial responsibility by emphasising the value of investing and saving for the future.

  • Protecting Your Child’s Future

    • Education Loans: This gives your child instant financial help so they may start working towards their academic objectives right now. They do not, however, provide any financial security in the event of unanticipated circumstances. The surviving family members would be responsible for repaying the debt if the parent or kid passed away before it was all paid back.

    Education Plans: Additional benefits, such as life insurance for the parent and kid, are frequently included in this. This implies that the plan would keep raising money for the child's education even in the event of the parent's death. Furthermore, many education plans could include extra benefits like critical illness insurance or disability coverage, which would help with finances in the event of unanticipated events.

  • Investment Choices

    • Education Loan: An education loan has no investment component; it is only a borrowing system. Its purpose is not to generate any income; instead, it will accrue interest that needs to be paid back in addition to the principal.

    Education Plan: An education plan is a type of investment instrument that gives parents the choice to select between a loan, equity, or a mix of the two. These programs are designed to yield long-term returns, which can outpace inflation and offer a sizable corpus for future educational costs.

  • Death Benefit

    • Education Loan: There is no inherent death benefit associated with education debt. Depending on the terms of the loan arrangement, either the student or the co-borrower may be responsible for repaying the debt in the event of the borrower's death. In an already trying moment, this might put a financial strain on the family.

    Education Plan: A death benefit is a characteristic that most education plans have. The insurance company pays out a death benefit if the policyholder, usually a parent, passes away during the policy term. This money can be utilised to ensure the child's future education. Furthermore, the child insurance plan could keep making investments in the fund, guaranteeing that the child would get the maturity benefit on schedule.

  • Accessing Funds

    • Education Loan: Depending on the needs of the educational institution, education loans are frequently distributed in instalments. This indicates that money is progressively distributed to pay for particular costs. However, before each instalment is released, there can be more criteria, such as proving enrolment.

    Education Plan: More flexibility is provided by education plans. Either upon maturity or by way of a planned, systematic withdrawal, funds are accessible. For concentrated expenses, a lump sum distribution at maturity makes sense, but for spread-out costs, a systematic withdrawal plan offers a consistent income stream.

  • Tax Benefit

    • Education Loan: Under some circumstances, tax deductions are available for interest paid on student loans. This implies that you can deduct the interest you paid on your college loan from your taxable income. The particular guidelines and requirements for qualifying for this deduction may change based on the Indian tax regulations that are in effect. But generally speaking, loans put out for professional or higher education courses qualify for this deduction.

    Education Plan: In India, many tax structures allow for the deduction of premiums spent for education plans. This implies that you can deduct the premiums you pay for your education plan from your taxable income. Depending on the kind of education plan and the relevant tax regulations, there may be differences in the particular guidelines and requirements for claiming this deduction. Generally speaking, nevertheless, the deduction is allowable under specific restrictions and conditions under the Income Tax Act1, such as Sections 80C and 80D.

Which Option Will You Choose?

The choice between the two options while understanding an education loan vs education plan depends on your specific needs and financial goals. An education loan could be a good choice if you need funding for your child's educational costs right away. An education plan, however, can be a better option if you want a longer-term strategy with extra perks, such as financial security and possible tax benefits.

When making your choice about a child investment plan, take your long-term objectives, risk tolerance, and financial status into account. It is also a good idea to speak with a financial expert to receive tailored advice and suggestions depending on your unique situation.

Summary

Education loans and education plans serve the purpose of financing education but in different ways. While understanding education loan vs. education plan, it is noticed that education loans offer quick financial assistance, and have interest and payback requirements. Education plans, on the other hand, provide tax advantages and financial security through methodical savings and investment over time. Overall, choosing the best course of action necessitates a thorough assessment of both financial tools in light of your unique situation and your child's educational objectives.

FAQs on Education Loan vs Education Plan

Q: Is it better to take a loan for education?

Depending on your unique situation, you may need to decide between investing in an education plan or taking out a loan. You may need to seek out a loan if you want emergency financial support. On the other hand, an education plan might provide a more safe and fiscally responsible solution if you have the time to plan and invest.

Q: Which loan is best for education?

Several variables, including your eligibility, interest rates, periods of payback, and extra benefits, will determine which college loan is ideal for you. It is a good idea to consider the offers from several lenders before choosing one.

Q: What happens if an education loan is not paid?

The lender may take legal action, such as taking your possessions or garnishing your salary if you do not return your college debt. It's critical to make payments on schedule to prevent these issues.

Q: Which is the best education plan in India?

Your unique demands and budgetary objectives will determine which Indian education plan is perfect for you. It is advised to evaluate the many insurance company-offered education plans and select the one with the best features and advantages.

Q: Can education plans offer financial protection in case of unforeseen events?

Indeed, a lot of school programs include parent and kid life insurance. This guarantees that your child's education will not be jeopardised in the event of the parent's untimely death by providing financial protection.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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1. Tax benefits are subject to conditions under Sections 80C, 80D, Section 10(10D) and other provisions of the Income Tax Act, 1961.

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