Taking out an education loan allows families to finance higher education without draining their hard-earned savings or long-term investments. However, families often overlook a crucial structural decision: whether the primary should be held in the parent’s or the student’s name.
Who should be the primary borrower?
Unlike traditional consumer debt, evaluate a candidate’s future earning capacity rather than just existing income.
- Primary Borrower: The student should serve as the main borrower because they will earn the future income to clear the balance. For many young adults, this acts as their introduction to personal finance and credit building.
- Co-Borrower Role: Parents typically join as co-borrowers or guarantors to fulfill institutional lending criteria. Because students lack credit histories or active salaries, parent support remains necessary for initial qualification.
- Lender Evaluation: Traditional banks focus heavily on the parent’s current income, credit profile, and pledged collateral. Conversely, specialized education lenders prioritize the academic institution, field of study, historical campus placement records, and projected graduate starting salaries.
Structuring EMI repayment plan
Families must look past the initial loan approval and map out a realistic post-graduation repayment strategy.
- Discount Future Earnings: When estimating future income based on university placement data, reduce official campus average salary figures by 20% to 30% to build a realistic safety buffer.
- Apply the 50–60% Income Buffer Rule: A graduate’s expected post-tax monthly earnings should exceed the (EMI) by at least 50% to 60%.
- Account for Living Costs: The remaining salary must comfortably cover essential post-graduation expenses, including rent, food, taxes, insurance, and local transportation.
- Factor in Foreign Exchange Dynamics: For international studies, factor in higher living costs, starting salary variance, and foreign currency exchange rates against the rupee.
Maximising tax benefits under Section 80E
The Income-tax Act offers targeted tax relief for families financing higher education under the Old Tax Regime.
- Interest Deduction: Under Section 80E, taxpayers can claim a tax deduction on the full interest portion of the loan repayment. Principal repayments do not qualify for this deduction.
- Uncapped Limit: The deduction covers the full amount of interest paid with no upper monetary cap.
Eligible Beneficiaries: The tax benefit applies to loans taken for the higher education of the taxpayer, their spouse, their children, or any student for whom they act as a legal guardian.