Education Loan vs. Mutual Funds: Which is Better for Higher Education?

When it comes to funding your child’s higher education, two common options are: taking an education loan or building a fund through mutual investments. Both have their pros and cons, but which one is better for you? Let’s break it down with some examples.

Education Loan:
How Does It Work?
Suppose you take an education loan of ₹40 lakhs to fund your child’s higher education, such as an MBA, 10 years from now. Typically, the interest rate on education loans in India is around 10% per annum.

Example: Education Loan Calculation
a. Loan amount: ₹40 lakhs
b. Interest rate: 10%
c. Loan tenure: 7 years (after course completion)

Once the MBA is done, you will start repaying the loan. The monthly EMI to repay ₹40 lakhs over 7 years at 10% interest would be around ₹66,528. Over the 7-year period, you will end up paying ₹55.94 lakhs (including interest).

Total cost of loan: ₹40 lakhs (principal) + ₹15.94 lakhs (interest) = ₹55.94 lakhs.
 

Mutual Funds:
How Do They Work?
Instead of taking a loan, what if you invest in mutual funds to save for your child’s education? You can start a Systematic Investment Plan (SIP) and let the money grow over time. With an estimated education cost of ₹40 lakhs after 10 years (considering inflation), you can plan your savings accordingly.

Example: Mutual Fund SIP Calculation
a. SIP amount: ₹20,000 per month
b. Investment period: 10 years
c. Expected annual return: 12.93%

If you invest ₹20,000 monthly for 10 years with an annual return of 12.93%, your investment will grow to ₹46.6 lakhs. This will cover your child’s higher education cost without needing a loan, and you will still have some surplus left over.

Comparison of Costs: Education Loan vs. Mutual Fund

Let’s see how the numbers compare if you take a loan vs. investing in mutual funds:

Key Differences:
With an education loan, you end up paying ₹15.94 lakhs extra in interest, and after 7 years, you’ll have repaid a total of ₹55.94 lakhs.
With a mutual fund SIP, you invest ₹24 lakhs over 10 years and build a corpus of ₹46.6 lakhs, which is enough to cover the ₹40 lakhs needed for your child’s education, and you’ll have ₹6.6 lakhs left over.

Which Option is Better? 
Choosing between an education loan and a mutual fund (SIP) depends on your financial situation, goals, and timeline. If immediate funds are required and planning in advance isn’t possible, an education loan can help cover expenses quickly, though it does come with debt and interest costs. On the other hand, if you have the ability to plan early and consistently invest, mutual funds can build a debt-free education corpus with potential for growth, although there is some investment risk. Evaluate your needs, risk tolerance, and financial flexibility to decide which option best suits your situation.