Student or parent: Who should be the primary borrower for education loan? Check repayment and tax implications before deciding - The Economic Times

When a child gets admission to a college or university, an education loan can help a family fund the cost without immediately exhausting its savings or investments. But there is another decision that often gets overlooked: whose name should the loan be in, the parent's or the student's?Should the education loan be in the student's name or parent's name?Education loans are different from most other loans because the lender is effectively assessing the student's future earning potential rather than current income, says Prashant Bhonsle, CEO, Kuhoo Finance.“The student is, and should be, the primary borrower, they are the one who is going to be earning and eventually repaying, and this is invariably the first financial product a person takes in their life,” he says.This structure also gives the student an opportunity to start building a credit history early. A clean repayment record can become useful later when the student applies for other forms of credit.ET Online

When should loan be taken by student, and how it benefits?The student should be the primary borrower, while a parent may join as a co-borrower or guarantor depending on the lender's requirements.However, being the primary borrower does not mean the student has to qualify on their own. A student with no salary or credit history may still need a parent as a co-borrower, depending on the lender's policy.Traditional lenders may place significant weight on the parent's income, financial profile and collateral, while some specialised education lenders may place greater emphasis on the student's course, institution, placement record and expected income.Who should repay the EMI after the student graduates?This is where families should think beyond the loan sanction.If the student is expected to earn after completing the course, families should assess the borrowing against the student's likely future income rather than assume that the parent will continue paying the EMI.Bhonsle recommends working backwards from the student's expected salary and being conservative about the estimate.“Whatever average salary an institute claims, discount it by 20–30%, since an average means some earn less. As a rule of thumb, the student's income should be at least 50–60% higher than the EMI, and you work backward from that to decide how much to borrow,” he adds.The EMI should leave enough room for rent, food, insurance, taxes, travel and other living expenses. The calculation becomes even more important for overseas education because the student's starting salary, living costs and repayment currency can be significantly higher than what the family is used to in India.Families often make the mistake of sizing the loan based on the admission offer rather than the repayment period that follows, says Sonal Kapoor, Chief Business Officer, Prodigy Finance.“The mistake I see most often is families sizing the loan to the offer letter, not to the years that come after it.”Does putting the loan in the parent's name offer a tax advantage?Under Section 80E of the Income-tax Act, the interest paid on an eligible education loan can qualify for a deduction under the old tax regime. The deduction is available for interest, not principal, and there is no monetary cap on the amount of interest that can be claimed, subject to the conditions of the section.The loan can be taken for higher education of the taxpayer, their spouse, children or a student for whom they are the legal guardian, subject to the conditions of Section 80E.ET Online