October 22, 2019
Education Loan, Loan Repayment Tips, Student Loan
Taking an education loan has its own pros and cons. While it helps finance a student’s higher education, it also means that the student, after having graduated has to shell out a good, if not significant, chunk of his or her salary to repay it in the form of EMIs.
In this blog, Student Cover provides certain tips for students to repay education loan without overburdening oneself.
“If you can count it, you can control it”. Expenses such as monthly recharge cost for cable TV, Mobile & Internet, house rent, utility bills etc. are recurring in nature and more or less fixed. Hence, they are easy to plan. However, spending on travel, dining out, shopping etc is where one needs to be careful. If these expenses are not controlled, they might lead to shortage of cash at the time of paying EMIs.
A penny saved is a penny earned. While one should not be a miser, there is no harm in buying things at a lower price from a discount store as compared to buying the same thing from an up-market shop. Certain shops and sellers offer festive discounts and loyalty points. One should make use of those to save few extra bucks. Such savings may look small but, over time, they add up.
Certain banks and lending institutions offer moratorium of 3 or more years to borrowers of education loan. This means that during that period, a person does not have to pay any EMI. However, this does not mean that one cannot pay the interest amount before the EMI starts.
Part payment of interest which starts accruing the day the loan amount is disbursed helps in bringing down the EMI considerably. Some banks also give discount on EMI interest rate if the borrower pays the interest portion of the loan during moratorium period.
The interest on principal starts not on the day the loan is sanction but on the day the amount is actually disbursed. So if a loan amount of Rs. 30 Lakhs is sanctioned for tuition fees, the interest only starts accruing on the actual amount borrowed or withdrawn from the bank/lender either to student’s own account or to student’s debtor such as University directly.
Example: ‘A’ wants to do MS in the US and needs an education loan of Rs. 30 Lakhs. Bank ‘B’ offers education loan at 10% rate of interest. ‘A’ applies for education loan with bank ‘B’ in January, 2020. The bank sanctions the loan in February. However, the student needs only Rs 7 lakhs to pay the first semester fees in August 2020, Rs. 8 Lakhs for 2nd Semester in January 2021, Rs. 7 Lakhs for 3 Semester again in August 2021 and Rs. 8 Lakhs for 4th Semester in January 2022.
So, instead of transferring entire amount of Rs. 30 Lakhs to his or her account on August, 2020, the student can withdraw that amount in part i.e. Rs. 7 Lakhs in August 2020, Rs. 8 Lakhs in January 2021, Rs. 7 Lakhs in August 2021 and Rs. 8 Lakhs in January 2022.
That way, when he completes his or her graduation by August 2022, he or she will have a pending interest of Rs. 1.4 Lakhs (10% of Rs. 7 Lakhs for 24 months), Rs. 1.2 Lakhs (10% of Rs. 8 Lakhs for 18 Months), Rs. 0.7 Lakhs (10% of Rs. 7 Lakhs for 12 months) and Rs. 0.4 Lakhs (10% of Rs. 8 Lakhs for 6 months). A Total of Rs. 3.7 Lakhs as accumulated interest.
Had the student transferred Rs. 30 Lakhs at one go in August 2020, he would have had an accumulated interest of Rs. 6 Lakhs (10% of Rs. 30 Lakhs for 24 months).
If one’s education loan is such that it does not allow the borrower to make payments in advance, it is better to invest the money earned (through part-time work etc.) or savings made, in safe investments instruments such as fixed deposits, bonds etc. These not only ensure that you do not end of spending the money but also get interest on that amount. This money comes to aid during payment of EMIs.
In order to avoid any difficulty in repaying education loan, one must ensure that his or her daily expenses are under control. One must learn to save, part pay loan amount wherever possible and get loan disbursed to his or her account only when needed. One should also invest in safe instruments if one earns money during studies. These tips will help repay loan without much difficulty.
Disclaimer: The content of the following article is based on the personal research of the writer. Readers are advised to exercise discretion. Student Cover will not be liable for any wrongful interpretation of the content of this article. The data given in example is imaginary and not real. Any similarity with real data is purely coincidental.
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