How to fund child’s studies? Education loan better than mortgaging house, using savings


After the untimely death of her husband, Aparna has been focusing on providing the best education for her two daughters, so they can become financially independent in the future. Aparna works in a public sector bank, and has a limited amount of savings. One of her daughters has now secured a seat in an engineering college on merit. She requires Rs 10 lakh for the next four years to cover fees, hostel expenses and other costs. Aparna does not know how to fund this large sum. Should she draw on her investments or take a loan against her house? She wants to know how this can affect her future as well as the future funding requirements for her second daughter?

Aparna must consider an education loan as her first choice, as banks offer loans for professional courses like engineering. If the child is admitted to a reputed college with a good placement record, banks may be more than willing to offer a loan. Many educational institutions also have tie-ups with banks to arrange loans for students. An education loan takes care of all expenses, including the hostel fee. Also, the loan is repayable in instalments only after the course is over. So, Aparna’s daughter will be able to repay the loan herself, once she has completed her studies and has begun to earn an income.

The bank may require Aparna to guarantee the loan, which she should be able to, given her income and her PF balance. She will be required to step in for her daughter only if her daughter defaults on the loan. Here, it is important for Aparna to explain to her daughter the financial position of the family and instill in her the sense of responsibility towards repay loans.

Although drawing on investments might come at a lower cost, it might risk the other goals that Aparna has for her second daughter. It is also important for Aparna to protect her retirement corpus, so that she does not have to depend on her daughters. Taking a loan against the house may be cheaper, as it has the security of an asset. But it may result in Aparna mortgaging her only valuable asset for a single goal. She must avoid deciding emotionally and take the objective route of facilitating her daughter’s funding of her own education.