Education is perhaps an individual’s most precious resource
today. In fact, nowadays education is at times equated to an investment, which
in all truth it is. However, if we purely take perspective at education as an investment
point of view, the price of education at times requires you to take loans from
banks or other sources, which require you to pay off the debt after your
“investment” or education starts bearing fruits. As easy as loan grant sounds,
the more difficult it can be to pay off. However with careful planning and
timely repayments, one prevents himself/herself from coming under what is
called “debt pressure”.
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Should you prepay your education loan?
Education loan is basically an amount bank has paid on your
behalf. So with every passing day, this loan accrues some interest. You pay
this loan in EMIs because you cannot pay off all the loan amount i.e. principal
and interest at one go. So one way to limit the interest that you will pay on
education loan is to pay it off as early as possible. But education loan also
helps you save Tax under section 80E. We have created an excel sheet that will
help you decide when to pay off the education loan.
If you cannot prepay the loan, follow these tips while
paying EMI on the education loans in India:
1) Start Early:
Don’t wait till your graduation, to start planning on the
repayment. Have a repayment model ready as soon as the first phase of education
(generally the first semester) is over. This will enable you start saving early
and gradually ease off the pressure of the interest which piles up and by the
time of moratorium period ends, you would have already started with the
repayment. If you have some savings already in your account when you graduate,
you could start paying the loan even before the moratorium period begins. Do
keep in mind that your loan is accruing interest even during the moratorium
period.
2) Set a
comfortable EMI. Don’t be over ambitious:
Setting a lower EMI for a longer duration might just be a
better option than ambitiously trying to pay off the loan early. Paying off the
loan early is always the better option, but not by compromising on other
important needs like lifestyle expenses or training costs for furthering
professional skills.
3) Prefer a loan
from Government Bank (or PSU Banks):
PSU banksOpens in a new window typically offer loans at
lower rates than private banks. They are also more lenient when it comes to
prepayment of the loan. E.g. Andhra bank does not levy any charges for partial
or full repayment while HDFC banks charges penalty proportionate to the amount of
Education loans outstanding.
4) Speed up the
repayment using the tax benefits:
Education loans provide you tax benefits and the amount that
you save can actually be used quite significantly for paying off your debt
faster. One way to do this is calculate the amount that you save exclusively
from taxes and deposit it biweekly along with the ongoing EMI. This might seem
insignificant in the short run but saves you almost 3-4 months during the final
payment which results into about 25-30% lesser interest being paid.
5) Accelerate
your payments by adding very small amounts:
This is the best of all strategies. Even if you add ~100
extra every month for just 2 years consistently, you can save up to ~20,000 in
interest and you will end up finishing an 110 month loan in 106-107 months
saving 4 months.
6) Pay off some
part using bonus:
Every year, you will get bonus at the end of the year. You
can use this bonus to pay off part of your loan.
The key is to plan and stick to the model that you have
decided. Once you are earning in lakhs, a few thousands in the long run won’t
matter.
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