Pursuing the dream course today is not easy for all the students. However, with the rising cost of courses, tuition fees, and other expenses, it is important to explore various financing options. Two common options among us are education loans and fee financing. Both have their pros and cons and choosing between them requires careful consideration. Talking to Outlook Money Digital, Rohit Gajbhiye, MD and Founder of LEO1, an Edu-Fintech company, elaborated differences between education loans and fee financing to help students and parents make informed decisions.
Higher education loans are financial tools that are specially created to pay for higher studies after you complete K-12. Banks, credit unions or other financial institutions grant these loans to certified borrowers at a fixed or variable interest rate. Repayment typically begins after the education program has been completed. Let’s say, you took a loan of ₹15, 00,000 (hardly sufficient for your degree isn’t it?) with an interest rate of 9%, this is the amount that needs to be repaid over several years (starting six months after graduation). It covers a long list of expenses- From tuition to accommodation and books, etc. A loan can be very helpful when the needed amount is much beyond what you can fund at that moment.
It can be repaid after the student finishes study so there remains no burden on him to repay the amount. Also, making your education loan in EMI payments on time ensures that you can build a good credit history which might be handy for buying something big like a car or house apart from other types of loans. However, you should also be aware of the interest which accumulates in time and generates a much bigger repayment than the original sum. Debt is scary enough when you start to accumulate it, but when the burden of repaying those pesky student loans falls solely on your shoulders after graduation and there’s no income in sight? What’s more, an education loan — which requires a decent credit score or at the very least, a co-signer — isn’t available to all students, Rohit Gajbhiye explained.
Fee financing, also known as fee payment in instalment/deferred fee payment plan. It’s a form of financial assistance that allows students and their parents to pay school tuition fees in more affordable instalments over a set period. Fee financing is unlike education loans and can be availed by anybody — at even the K-12 level for one student of classes 1 to 10 in case of provider Financepeer— with EMIs during the course duration For instance if your annual tuition fee is ₹5,00,000, a fee financing plan would enable you to pay ₹41,666.67 per month spread over 12 months — thus making the payment of fees more manageable and less burdensome with instant outflow of money from your part.
Rohit Gajbhiye said that fee financing has a huge advantage in that it is generally interest-free, meaning you pay less over the long run than a loan you have to pay interest on. Non-homeowners or students without good credit are more likely to qualify as a consigner is not required for financing. A downside of financing fees is that financing fees typically only cover tuition and fee charges and not related academic expenses such as course material. Every school and institution provides financing fees based on its policies and not every school provides this option. Defaulting on a payment can result in fees and penalties that increase the cost of your education.
Choosing between an education loan and fee financing involves evaluating your financial situation, the nature of the educational expense, and the terms of each option. Here are some guidelines by Rohit Gajbhiyeto to help you decide:
Evaluate your Financial Capacity: Before taking any step check whether you can manage regular instalment payments during the course period or not. If your family can afford the monthly payments without financial strain, fee financing might be the better option due to its interest-free nature.
How much amount is needed: If you need an amount that is above your monthly re-paying capacity, especially for higher education, an education loan might be more appropriate. As Loans can cover a broader range of expenses, including accommodation and books it is best suited for you.
Check your future earnings: If you expect a steady and substantial income after graduation, taking an education loan could be easily manageable for you. Despite the interest rate, one can pay it easily without any failure.
Check institutional options: Ensure that the educational institution offers fee financing. If not, an education loan might be your only viable option.
Fee Financing: Ideal for payments for K-12 education or courses of a shorter duration where the cost is manageable when divided by smaller and interest-free payments. This option is suitable for those families who can afford to make monthly payments, without creating financial strain on the parents.
Education Loans: Ideal for higher education where the cost is significantly higher and you need to have a full package to cover tuition, accommodation, and related expenses. Also, this product is suitable for you if you would like to start repayments after you have graduated and started earning at a stable rate.
Opt for Fee Financing: When the total cost of education is something that your family could manage to pay off comfortably in instalments. And you want to avoid the interest payments that accompany borrowing money. It's also an easy way to go if your institution offers the option and is covering the total cost of tuition.
Opt for Education Loans: For when you need a substantial amount of money that is above your immediate financial means and want to be able to pay it over an extended period. This is particularly useful for higher education, where comprehensive financial support is needed.
Education helps in shaping our future and choosing the right financing option is very important for our financial well-being. Before choosing any of the above, weigh the pros and cons carefully and make an informed decision that suits your circumstances. Remember, investing in your education is an investment in yourself, Rohit Gajbhiye said in conclusion.
