Just like everything else, course fees are also getting steeper, particularly when it comes to premium institutions whether domestic or overseas. This is where education loans come to the rescue and offer major financial help to students interested in pursuing higher studies. Here are 9 important tips to help you manage your education loan wisely and pay it off with minimal financial strain:
- Evaluate All Course-related Expenses
Before taking a final decision on the education loan, evaluate how much the course will cost inclusive of everything – cost of living, tuition fees, uniform, course equipment costs etc. Check availability of financial aids and factor in family contribution, if applicable to arrive at the required loan amount.
Draw comparisons between various banks and their offers and then pick the bank offering the best interest rates and moratorium periods, and overall terms and conditions. The moratorium period is a holiday period during which the education loan repayment needs not to be made. The period typically lasts through the course duration, plus one additional year after the course is completed or six months after employment, whichever is earlier. Pro-Tip: Many leading banks provide a discount on the applicable interest rate in case the loan interest is serviced during the moratorium period.
Check if the bank permits early loan repayment and allows advance EMI payments or part payments for loan repayment ahead of schedule. Find out applicable service charges on your loan, part payments and prepayments sometimes carry a penalty so, before signing, read and understand the fine print.
- Check available Financial Aids
Before opting for an education loan, ensure you check all financial aids (grants, scholarships, etc.) that you qualify for. These offer great financial support and do not have to be repaid unlike your education loan.
Banks are in business for profits and they charge interest on the total disbursed amount as education loan. It is smarter to take the loan as and when required as this largely reduces the interest burden. Instead of having the full amount sanctioned in a single lump sum, check if your bank can disburse the loan in parts as and when required.
- Check Options – Approved courses, colleges
Lenders usually have a list of approved courses and colleges that they allow a student to borrow an education loan for. In case your specific college or course does not feature in your prospective borrower’s list, you have the option of looking for another borrower that is better suitedto your requirement.
- Need for a Guarantor or Collateral
An education loan features the student as the primary borrower. However, the student’s parent or guardian needs to be a co-signor for the loan.In case of a married student, the spouse can also co-sign his/her education loan. In case of loan amounts higher than Rs. 4 lakhs, bank acceptable collateral such as fixed deposits, LIC policy, etc. will have to be provided by the student.
- Tax Benefits
Section 80E of the Income Tax Act offers tax benefits on the interest paid on education loans. Also, the tax deductions are available for initial assessment years and seven years post that, or until all the interest is paid off, whichever is earlier. This makes the maximum tax deduction period applicable to a home loan at eight years. Therefore, even if you opt for a longer loan tenure, you qualify for the tax benefit only for the initial eight years after taking the loan.
- Effect on tenure on the Education Loan
Some borrowers take loans for a longer tenure only because of the lower EMIs it entails. However, doing so increases the total interest payable on the loan. If you foresee good prospects of a well-paying job after your course, it is better to opt forshorter loan tenure. Although this would mean slightly higher EMIs, your loan will be less expensive and you will be done with the repayment quicker. However, when making this decision, ensure that you strike a balance between you repayment capacity and the shorter tenure.
- Moratorium Period and Repayment consideration
It is a great idea to leverage the extra time gained during the moratorium period to build a corpus. During the moratorium period, although students need not make loan repayments, interest still accumulates – Banks begin levying interest from the time of loan disbursement. This amount keeps accumulating, adding to the student’s overall debt burden. It makes sense to pay off at least a portion of interest during this time – this is where the corpus you build can be put to good use. Partial EMI payment during the moratorium period will lower the total loan cost when you finally begin paying your EMIs. Many leading banks offer a 1% interest concession to borrowers who start repaying the interest charged during the moratorium period.
- What happens if you are unable to make your scheduled payment
If a legitimate case is made, wherein the student is genuinely unable to secure a job owing to reasons beyond the student’s control, the lender may adjust the repayment schedule. Though convincing the bank may be a herculean task, once convinced about the genuineness of the situation, the bank may agree to extend the moratorium or repayment period. Banks may also make this exception for other situations beyond the borrower’s control due to which the course cannot be completed on time. However, such extensions are decided on a case by case basis. It is advisable to avoid defaults on repaying the education loan because it not only affects the student’s creditworthiness, but also the credit score of the parent who isthe co-borrower on an education loan.
- Making Payments During and after the Course
So long as it does not interfere with your studies, earning while studying is a good idea. This is especially true if you are studying overseas and your expenses are in dollars or pounds. A part-time job would help cover your personal expenses, provide you valuable work experience and could even mean that you need to borrow/repay a smaller loan amount. Additionally, servicing the loan during the moratorium period provides you with the added advantage of a decrease in your education loan interest rate.
Education loans are usually floating rate loans. The interest rates are typically base rates plus a fixed spread of around 1%to 2% – which may vary from one lender to another. However, there may be occasional interest rate fluctuations. It would therefore be wise to save some money to make room for interest rate spikes. A surplus equivalent to a minimum of three months EMIs is considered ideal to ensure that EMI servicing continues smoothly in case of unforeseen financial emergencies/sudden unexpected expenses.
Conclusion:
Work out a repayment strategy for your education loan before your EMI payments begin. Start budgeting and strategising as soon you begin earning, to pay back the loan comfortably and at the earliest. Extra cash, bonuses etc. could be directed towards making part payments as it would helpsave on a sizable amount ofinterest.Taking an education loan must be backed by solid planning and research, along with an understanding of all the associated implications.