Parent or student: Who should take the study loan?

When a child starts college or university, an education loan can help a family fund the costs without draining savings or investments. However, an often-overlooked decision is which name the loan should bear – the parent's or the student's.

Prashant Bhonsle, CEO of Kuhoo Finance, explains that lenders assess a student's future earning potential rather than current income. Therefore, the student should ideally be the primary borrower since they will be the one earning and repaying. This also allows the student to begin building a credit history early, which can be beneficial for future credit applications.

However, this doesn't mean the student must qualify on their own. Students with no salary or credit history may still need a parent as a co-borrower or guarantor, depending on the lender's policies. Traditional lenders may heavily weigh the parent's income, financial profile, and collateral, while specialized education lenders might focus more on the student's course, institution, placement record, and expected income.

The question then arises of who will repay the Equated Monthly Installment (EMI) after the student graduates. Families should consider the student's likely future income rather than assuming the parent will continue paying the EMI. Bhonsle advises working backward from the student's expected salary, discounting it by 20-30% for a conservative estimate, and ensuring the student's income is at least 50-60% higher than the EMI.

This calculation is crucial for overseas education due to potentially higher living costs and repayment currency.

Interestingly, putting the loan in the parent's name might offer a tax advantage under Section 80E of the Income-tax Act. This deduction is available for the interest paid on an eligible education loan, not the principal, and there's no monetary cap on the amount of interest that can be claimed. The deduction is particularly valuable if the parent is in a higher tax bracket, as it can be worth a significant amount.

However, this tax benefit should not be the deciding factor, as it depends on who will actually service the loan, which tax regime is used, and whether the conditions for claiming the deduction are met.

Lastly, families should consider government education loan schemes like PM-Vidyalaxmi. While these schemes determine borrower structure based on income, they do not cover study abroad or certain other overseas arrangements. Therefore, simply changing the borrower's name does not affect eligibility for these schemes. Families should first check if the institution and course qualify for the scheme and if the student is receiving any other scholarships that might make them ineligible.