Loan vs. Savings: What’s the Best Way to Fund Your Child’s Study Abroad Dream?

With rising costs of education and living, many families find it harder than ever to secure a spot for their child. The single biggest factor in realising the study abroad dream is the cost of funding an international degree. 

Education loans continue to be the default mechanism of funding for most Indian students. However, there is a strong preference among Indian parents for using savings. 

90% of participants in HSBC’s Quality of Life Report 2024 said they are willing to prioritize their child’s overseas education, even at the cost of their retirement.

The same report revealed that only about 53% of the parents had a savings plan to fund their child’s overseas education. While 40% of the 11,000 respondents expected their children to take loans, 51% hoped for scholarships, and 27% said they would consider selling assets to cover the expenses.

There is thus a gap between the intention to support and preparation for funding international education, which calls for better financial planning.

Tuition fees, living costs, insurance, and exchange rate volatility can push the total cost well beyond ₹1 crore, especially in countries like the USA, UK, Canada, and Australia. So, should you dip into your savings or opt for an education loan? 

Using savings avoids interest and debt. Education loans, on the other hand, offer flexibility and tax benefits while protecting retirement plans. 

Let’s explore what the best option is for funding your child’s education abroad: loans vs savings. 

Understanding the benefits of using savings

India’s household savings rate of 30.2% surpassed the global average last year. And about 41% of Indian students admitted to using personal/family funds for overseas study in the 2024 QS International Student Survey. Only 34% relied on loans and 15% on scholarships. Here are some potential advantages of self-funding education abroad:

• No Debt or Interest Burden – Self-funding means your child starts their career debt-free, without the pressure of loan repayments and accumulating interest.
• Financial Freedom Post-Graduation – Without EMIs, graduates can make career choices based on passion and long-term goals with no immediate financial obligations.
• Avoids Rising Interest Costs – With education inflation and fluctuating interest rates, using savings shields you from long-term financial burdens.
• No Collateral Required – Unlike some loans, using savings does not risk family assets.

While savings remain the main source of funding, for many, education loans continue to be a viable funding method. 

Advantages of using loans to fund education

Outstanding education loans in India reached nearly ₹1.3 billion (₹1,300 crore) last year. The sharp rise was driven by increasing education costs and demand for degrees at private institutions.

Education loans, which range from ₹7.5 lakh to ₹1.5 crore, can also cover tuition, living expenses, travel, books, and more—sometimes up to 100% of costs. Here are some benefits of 

• Repayment Flexibility – Loans typically offer a moratorium period, which allows repayment after course completion or a year after graduation. This reduces immediate financial strain on families and allows your child to pay off the debt from future earnings.

• Preserves Savings – Loans allow you to keep your savings intact for emergencies, retirement, or other goals.

• Tax Benefit – Interest paid on education loans qualifies for tax deductions under Section 80E of the Income Tax Act.

• Builds Credit History – Timely repayment helps students establish a good credit score, aiding future financial needs.

Loans can also bridge the gap if savings fall short and allow your child to pursue education without compromising financial stability. In some cases, it can also be cheaper than using savings. For example, if you borrow ₹50 lakh at 10% interest for a year, your total interest would be ₹2.74 lakh. But with a 30% tax benefit, your actual cost drops to about ₹1.92 lakh, or just 3.85% of the loan amount.. If you use savings instead, you miss out on potential investment returns, ₹5 lakh at 10%. So, loans can be more cost-effective when you factor in tax benefits and investment growth.

Education loans vs savings for study abroad costs

Here are some scenarios to help you decide between using savings or loans:

While savings have their merits, the cost of international schooling for a three or four-year degree program can use up to 64% of Indian parents’ retirement savings. 

Moreover, the changes in Indian tax policy have further incentivized the use of education loans over self-funding. 

Self-funded remittances above ₹10 lakh attract a 5% TCS and can increase the cost of self-funding for most families.

However, there are several other considerations to keep in mind. The possibility of debt and finding the best education loan with low interest rates are some roadblocks in securing funding. GradRight’s loan search platform is the ideal solution for the problem. It lets you compare loan bids from over 15 lenders and complete the whole loan approval process online within days.

Hybrid approach: combination of loans and savings

The natural solution to the funding debate can be a mix of both, or more, funding options. 

In a hypothetical scenario, using 50% loan and 50% savings for a ₹50 lakh study abroad expenses results in an EMI of ₹2,19,789 and a total repayment of ₹26,37,478 on a ₹25 lakh loan. The opportunity cost of using savings would be ₹2.5 lakh. This would amount to a total cost of 6.92% and balance savings (liquidity) and loans (debt) for studying abroad.

You can also consider the following strategies: 

• Withdraw from investments that have matured or are less likely to yield high future returns, and use loans to cover the rest.
• Keep a portion of savings untouched as a safety net and rely on loans for the bulk of expenses.

Mixing in other sources of funding such as scholarships, scholarships, grants, and crowdfunding and part-time work opportunities. 

Making the right decision

Choosing the right funding is necessary but creating a budget that considers the full set of expenses is just as important:

• Tuition
• Accommodation
• Insurance
• Study materials
• Living expenses
• Travel
• Emergency 

It gives you an approximate total cost and when you need to pay what, so you can make a financial plan. This, in turn, helps you make the decision. 

On top of securing the required funding, planning for international education requires juggling other tasks. These include selecting the right course and university, and meeting the admission criteria for the desired university. GradRight’s university search platform is the one-stop solution to streamline this process.

FAQs

1. How to fund your child’s study abroad dream: with savings or loans?

It depends on your financial situation. Loans offer tax benefits and preserve savings, while self-funding avoids interest but may strain long-term finances.

2. What are the advantages of using savings instead of loans?

Using savings avoids interest payments, debt stress, and EMI obligations. It gives your child financial freedom after graduation and protects family assets from collateral risks.

3. How do education loans work, and are they a good option?

Study abroad loans cover tuition and living expenses when savings are limited or better invested elsewhere. The pros and cons of using loans for study abroad funding.

4. Is it wise to deplete my savings to pay for my child’s education abroad?

Not always. Savings can compromise your retirement or emergency funds. A loan can help balance liquidity, tax planning, and long-term financial security.

5. Can I use a combination of loans and savings to fund education?

Combining both allows you to minimize debt and preserve savings. It balances financial flexibility, reduces borrowing costs, and spreads the funding burden wisely.