HIGHER education has become pretty expensive these days. More and more people are finding it difficult to fund it and hence are resorting to education loans. If you have got admission in your dream college and are looking for an education loan, it is important that you assess various options available and take into account factors such as interest rates, eligible loan amount, repayment options and prepayment options available.
But what should be the ideal loan tenure? Should you choose a longer tenure as you are not sure what kind of job you will get or what will be your pay scale? Or is opting for a shorter tenure more beneficial?
Ideally, the shorter the tenure of a loan is the better. Let us see why.
Less interest
Any loan is a liability so it’s better to get rid of it as soon as possible. Longer the duration, higher will be the interest. Some people are not sure of paying high EMIs in the early stage of their career, so to be on the safer side they opt for a long-term loan but this will have an adverse effect on your pocket. Let’s calculate to give you a better idea. So, a loan of Rs 15 lakh at 13% for 10 years will have an EMI of Rs 22,397 but the same loan for tenure of 15 years will bring down your EMI to Rs17,574. However, your total interest outgo will shoot up. For the 10-yearloan, you will pay an interest of Rs11.88 lakh whereas in the other case, the total interest outgo will be Rs19.16 lakh.
Note the difference, it is huge! However, it’s a tough call to make as with a short-term loan there is a possibility you may not get a high-paying job right after college. So, plan accordingly!
Tax benefits
You can avail tax deduction on the entire amount of interest paid on an education loan under Section 80E of the Income Tax Act. However, there are two conditions to it:
1. A loan should be taken from any of the scheduled banks in India or the two Gazetted financial institutions — Credila Financial Services Ltd and HDFC Ltd.
2. A deduction can be availed only for the initial assessment years plus the next seven assessment years or until the interest is paid in full, whichever is earlier. Basically, you can avail the deduction for a maximum of eight years only. So, if you increase the tenure of the loan to reduce the EMI burden, you will have to forgo the tax benefit.
Investment planning
A long-term loan will adversely affect your ability to save and invest as you will continue to be under the EMI burden. After you get a job, you will not only need to pay toward your EMI but will also have to invest for future goals. As a result, your investment planning will take a hit as finances will be stretched thin.
In essence, get rid of your education loan as soon as possible so that you can invest more in your future.
By Naveen Kukreja
First published in The Tribune