Tips to effectively repay education loans
For some an education loan is the only way to achieve their goals. Here are a few tips on how you can repay your education loans.
Higher education can be frightfully expensive, especially if you aim to go abroad. With limited number of scholarships available, education loans are the only other way to fulfil your dream of a foreign degree.
Education loans are on par with housing loans under the priority-lending category. The government has mandated that no student who meets the parameters should be denied an education loan. All these measures have ensured that getting an education loan is fairly straightforward. Repaying the loan, however, is a tricky affair that requires careful planning.
You must think about how you are going to repay the loan while applying for it. Having a repayment strategy is crucial. Here are some tips:
Repayment does not start immediately. You get a “moratorium period” or a repayment holiday of either a year after the end of your course or six months after you get a job, whichever is earlier. Make the most of this period. You can use this extra time to build a corpus that can be used for a partial pre-payment at a later stage.
If you are abroad and are able to save some money by working part-time, you can also repay some interest during the study period. Although your EMIs start only after the moratorium period, the bank starts levying interest from the day it disburses the loan. The amount keeps adding up increasing the debt burden. Repaying the interest will help lower EMIs. Many banks also give a 1% interest concession to those who repay the interest debited during the moratorium period.
Take the loan in instalments
Course fees are normally paid in tranches or portions, often semester-wise. Therefore taking the loan in a lump sum makes little sense. Going for instalments helps reduce the interest you pay.
Beware of rate fluctuations
Education loans normally have a floating rate of interest, which means the interest is typically the base rate plus a fixed spread of around 1-2%. Once you start earning you must make provisions that will act as a buffer for future rate hikes. A rule of thumb is to maintain a surplus of three instalments’ worth, to ensure that the EMI payments are uninterrupted.
Tenure of Loan
Although banks offer investors up to 15 years of term, you can claim a tax deduction towards the interest payment only for eight years. So havinga loan tenure longer than that doesn’t make financial sense.
If you are the student then the education loan must always be taken in your name, so you can take the benefit of Section 80E. If your parents take the loan then you will not be eligible to claim this benefit.
Pre-payment of Loan
Most pre-payment of loans carry a penalty. So we would advise you to do a proper cost-benefit analysis before you take the decision to pre-pay an education loan.
Do not default
Last but not least, do not default on your education loan. If you do, it will spoil both your credit score and the credit score of your parents, if they are co-borrowers. If an EMI is overdue for 90 days, your loan will be treated as a non-performing asset. Not only will it severely affect your credit health, but your collateral will also be at risk if your loan amount is higher than Rs7.5 lakh.