Sometimes higher education demands a huge financial investment. Borrowing money to meet the tuition, living expenses, or other study-related costs by many students and families is an option. There are two typical alternatives of student (education) loans and personal loans. But which one makes more sense? The answer will be of your financial position, objectives, and loan characteristics. We are going to compare the two options in the following and bring out the main aspects to enable you to make an informed choice.
What are Education Loans?
Education loans are specially provided to enable students to finance higher education. These loans are made more preferable through special government-sponsored schemes in most countries, such as India. For example:
- PM Vidyalaxmi Scheme: A scheme initiated by the central government of India to offer collateral and guarantor-free education credits, particularly to students being enrolled in specific institutes of higher education, which are known as quality higher education institutions or QHEIs.
- Interest Subvention: Here education loan interest subvention is to 3 per cent on the amount of the loan not exceeding 10 lakh during the moratorium period (course period + 1 year).
- Credit Guarantee: In the case of loans of up to 7.5 lakh, the government guarantees 75 percent credit under the Credit Guarantee Fund Scheme for Education Loans (CGFSEL).
- Longer Term: The maximum tenure of repayment of these education loans may be 15 years (without the moratorium) according to the PM- Vidyalaxmi scheme terms.
- Tax benefit: Section 80E of the Income Tax Act of India allows interest charged on education loans to be tax-deductible.
- Interest Rates: According to SBI (one of the largest state banks), its education loan rates stand under PM-Vidyalaxmi: e.g., PMVL-Utkarsh is 7.15, PMVL-Uttam is 7.45, etc.
What Are Personal Loans?
Personal loan is a more generic borrowing that does not come with a particular purpose. The money can be used on pretty much anything, like education, but the conditions are very different as compared to education loans.
The following characteristics of personal loans:
- Flexibility: In contrast to education loans, personal loans do not have specific limitations on how the money is used.
- Rapid Crediting: They are not secured and are not bound to a specific use-case; as a result, they may require fewer documents, which causes faster disbursement.
- No Grace Period: As a rule, personal loans are not accompanied by a grace period (moratorium). The repayment normally starts right after the disbursement.
- Increased Interest Rates: Education loans may have low interest rates compared to Personal loans.
- Prepayment Penalties: There are prepayment penalties whereby lenders charge an early payoff of personal loans.
- No Tax Benefit: In general, the loans spent on education in the form of personal loans are not tax-deductible under Section 80E (or similar) since they are not education-related loans
Key Dimensions of Comparison
A table that summarizes and contrasts student loans and personal loans using recent data.
| Aspect | Education (Student) Loan | Personal Loan |
| Interest Rate | Often lower, especially under subsidized government schemes. For example, SBI’s PM Vidyalaxmi rate is 7.15% (PMVL-Utkarsh). | Generally higher, since it’s unsecured; ranges can go up significantly based on credit profile. |
| Eligibility / Guarantee | Can have a credit guarantee (e.g., CGFSEL covers 75% default for loans ≤ ₹ 7.5 lakh). NCGTC May require a co-applicant, depending on the bank. Income-based subsidy possible. | Based mostly on credit score, income, etc. No purpose restriction; no special subsidy or guarantee.No moratorium usually |
| Loan Amount / Quantum | Designed for education-only expenses (tuition, hostel, books, sometimes living costs). Loan tenure can be long (e.g., up to 15 years in PM-Vidyalaxmi. | Meant for flexible use; you could borrow for education, but also for other needs.Repayment tenure is usually short (1–5 years, according to some lenders). |
| Repayment Terms / Moratorium | Often, a moratorium (course + 1 year) in government schemes. Example: PM-Vidyalaxmi also considers a moratorium in its guidelines. | No or limited moratorium; repayment typically starts after disbursement. |
| Tax Benefits | Yes, interest paid may be deductible under Section 80E for up to 8 years. | Usually, no, as personal loans are not “education loans” per se. |
| Collateral / Security | In some cases not required (especially under PM-Vidyalaxmi for up to ₹ 7.5 lakh). Education Ministry India A credit guarantee may substitute for security. Repayment tenure may be long. | Typically unsecured (no collateral), but due to risk, rates may be higher.Shorter tenure equals more pressure on monthly repayments.Possibility of a prepayment penalty. |
| Application Complexity | More documentation needed: admission proof, fee structure, etc. | Less stringent documentation; simpler and faster to apply. |
Public Sector Banks disbursed around ₹28,699.02 crore in education loans in FY 2023 to 24, and the number of education-loan accounts increased from 629,594 in 2022 to 23 to 736,580 in 2023 to 24, according to official responses from the Department of Financial Services / parliamentary annexures.
Pros and Cons: A Balanced View
Student loans and personal loans differ in their purpose, interest rates and the kind of flexibility it offers. Both has certain advantages and disadvantages based on which you can make a firm choice.
Pros of Education Loans
- Reduction in the Cost of Borrowing: These loans are reduced by subsidies or by reduction in base interest and the loans are cheap in the long term.
- Flexible Repayment: Moratorium during the study alleviates the strain on the wallet in case income is not stable yet.
- Tax Saving: According to Section 80E, interest is tax-deductible.
- Credit Support: Government guarantee (similar to CGFSEL) is assistive in students that might not have collateral.
- Long Repayment Tenure: Disperses EMIs over a long period of time making the individual EMIs manageable.
Cons of Education Loans
- Complicated Process: More paperwork (proof on admission, course fee structure, etc.) might lead to a delay in disbursement.
- Eligibility Limits: There are schemes (such as PM-Vidyalaxmi) that are limited to a particular institution (QHEIs) or group of income earners.
- Limit on Subsidy: Subversion can only be extended to loans to some limit (e.g., PM-Vidyalaxmi provides 3% subversion to loans to a limit of 10 lakh).
- Long-Term Competence: It has been proven to be EMI-wise, but this implies a cost in terms of interest paid over a long period.
Pros of Personal Loans
- Speed & Flexibility: Quick approval, reduce paperwork, and are not limited to use cases.
- Freedom in Use: Money could be spent on any expense (tuition, living, equipment, travelling).
- No Co-applicant / Collateral: So, as a rule not required by the lender.
- Convenient in the Short-term or Minor Necessities: Perfect for small-time or emergency study expenses, which are not funded by an education loan.
Cons of Personal Loans
- Greater Interest Rates: Borrowing can be done at a much higher cost.
- Nonexistent Grace Period: Repayment begins as soon as possible, and this can be cumbersome to a student.
- Tax Disadvantage: No education tax advantage.
- Reduced Tenure: This implies increased EMI load; reduced time to pay.
Should One Alternative Be smarter than the Other?
Go for an Education Loan when:
- You are borrowing a huge loan (tuition + living) on a long course.
- You desire a time out so that you do not have to pay at once.
- The guarantee (Section 80E, guarantee) is a valuable tax benefit to you.
- You like lesser monthly EMIs over a long period of time.
Personal Loan is to be considered when:
- You will require an urgent or smaller amount of money (laptop, books, short-term course).
- You are not eligible or do not have the documents to help you in education-loan schemes.
- You are sure to pay within a short time and are not bothered with greater EMI and interest.
- You would like the freedom in the way you spend the borrowed cash.
Conclusion
No single smart decision exists between a student (education) loan and a personal loan; the best choice will be dependent on your particular situation. Government-sponsored education loans are usually more hospitable with regard to interest rate, repayment flexibility and taxation. However, personal loans can provide a quicker and more adaptable way of dealing with more urgent, smaller or non-tuition-based needs.
When you are planning your higher education it is better to compare the two in terms of your budget, size of the loan that you intend to take, your ability to repay and your long-term strategy. In the case of many students, a hybrid solution would be even reasonable, i.e. taking an education loan to finance big bills, and a personal loan to finance smaller, additional ones.
DISCLAIMER: The information given in this blog is for educational purposes only. Any content of this blog is not investment advice.
