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

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.

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.

This can make the parent's name relevant if the parent is the eligible borrower and is actually paying the interest on the loan.

The tax benefit can be more valuable when the person servicing the loan is in a higher tax bracket, points out Kapoor.

“A student who's just finished a two-year master's is usually in a lower tax bracket in those early repayment years, sometimes not earning enough for the deduction to be worth much at all, while a parent further along in their career is often in a higher bracket, where the same deduction is worth a good deal more,” she says.

The deduction is available for the year in which repayment of interest starts and the following seven years, or until the interest is paid in full, whichever is earlier.

Importantly, Section 80E is available under the old tax regime, not the new tax regime.

So, families should not decide whose name the loan should be in based only on the tax benefit. They should first check who will actually service the loan, which tax regime they use and whether they satisfy the conditions for claiming the deduction.

What about government education-loan schemes such as PM-Vidyalaxmi?

Borrower structure should not be the first question if the family is considering a beneficial government scheme like PM-Vidyalaxmi. The first question is whether the course and institution are eligible.

PM-Vidyalaxmi covers loans for admission to the specified list of Quality Higher Education Institutions (QHEIs) in India. The scheme does not cover study abroad, and certain other overseas-campus arrangements are also excluded, highlights Kapoor.

For eligible domestic institutions, the scheme uses the family's income for determining the applicable interest subvention. According to Kapoor, the family for this purpose includes the student, father, mother and spouse, where applicable.

Families with annual income up to ₹8 lakh can qualify for a 3% interest subvention during the moratorium period, subject to the scheme's conditions. Students from families earning up to ₹4.5 lakh can get an interest waiver during the moratorium for eligible technical or professional courses at qualifying institutions, subject to the scheme's conditions.

Therefore, simply changing the name of the borrower does not change the income test under the scheme.

Before relying on PM-Vidyalaxmi, families should check three things: whether the institution appears on the current QHEI list, whether the course qualifies for the applicable benefit and whether the student is already receiving another scholarship that could make them ineligible for the scheme.

The exact borrower and co-applicant structure, however, can depend on the lending bank's own credit policy.

What should families check before choosing the borrower?

The decision should ultimately come down to who can borrow at a reasonable cost and who can realistically repay the debt.

If the student is enrolling in a distinguished course in a reputed institution and can qualify for a competitive education loan, keeping the student as the primary borrower can help establish their credit history and align the debt with the person expected to repay it.

If the student has no income and the lender requires a parent as co-borrower, involving the parent may be necessary for approval. The parent should then assess how the additional obligation affects their own loans, retirement planning and cash flow.

Families should also understand how interest accrues during the study and moratorium period. If it is capitalised and added to the outstanding loan, the eventual EMI and total repayment can be higher than expected.

Before signing, compare the interest rate, processing fees, collateral requirement, moratorium, repayment tenure, prepayment terms and the way interest during the moratorium is treated. Do not compare lenders only on the EMI shown at the time of sanction.