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Gaurav Gupta
Education loan is seen as an easy way to achieve one’s academic ambitions and offlate this has become quite popular with parents as well as students. However, repaying this loan can be painful if some precautions are not taken in the beginning itself. There are multiple questions that young borrowers often have to deal with regarding repayment. What are the best ways to repay an education loan? What if you fail to make a payment? How to ensure that your loan repayment doesn’t become a financial burden? Keeping all these in mind, here is a guide to help you plan better when it comes to repaying your education loan:
Create a smart plan and look out for the best value loans: A burden-free loan repayment requires a smart plan, which is why you must start with strategising for a 5-6 year repayment plan as soon as your loan is approved. Find out how much amount you will be required to pay every month as per the terms and conditions of your repayment, and accordingly start mitigating your expenses to save a tad more than usual.
It goes without saying that loans offering the lowest interest rates are more preferable, although some personalised education loans may offer value-added benefits. Therefore, it is advisable to compare different quotations and identifying which ones offer you the maximum value.
You must also remember that one needs to pay 5 per cent margin money for studying in India and 15 per cent for studying abroad. Margin money is a percentage of expenses that you pay while the lender pays the rest. However, this margin money might be completely waived off if your academic performance indicates merit.
Factor in all current and future capital inflow/outflow: Calculate the loan amount once you decide which course to opt for. Remember, your expenses will also include hostel fee, mess expenses, and miscellaneous expenses, apart from the tuition fees. Then subtract the amount that you will get from your parents to get to the final loan figure.
Besides this, make sure you choose a course that will help you in repaying the loan amount right from the moment you graduate. Skim through the 'average salary package' offered to students in your course and also look closely at the placement history of the universities where you’ll study.
Always have a Plan B: When applying for an education loan, always evaluate all possibilities. What if you don’t get a job and unable to repay, or what if the market goes down just as you’re graduating? This is why it is advisable to opt for loans that offer an extension on the moratorium period. Such extensions are mostly triggered if you opt for another higher course/studies immediately after finishing your current course. Banks also sometimes extend your repayment period if you discontinue the course in between, due to reasons beyond your control. In the best-case scenario, you can get your moratorium extended by a maximum of two years.
Restructuring and refinancing: Refinancing is using another loan to repay the original lender. Once you complete your education and have a job in hand, you are in a better position to negotiate the terms of your existing loan with the lender. Keep a watch on interest rate trends and opt for a balance transfer if you find another lender, willing to give you a loan at significantly lower rates
Student Loans
Cost-analysis for prepayment: Prepare a proper cost-analysis if you decide to prepay your loan amount as the interest outgo you save on prepaying should be higher than the prepayment penalty. Try to opt for a loan with less stringent prepayment penalty clause. You can also look at paying an additional amount with every EMI. This amount will be considered as an early payment on the principal and will be carried forward to your next monthly EMI, thus also bringing down the net interest that you have to pay. However, before deciding to prepay, ensure that you have adequate money for your needs for a few months.
Maintain an adequate surplus: Life is full of unexpected developments, and extenuating circumstances that can add to your financial burden are not uncommon. The uncertainty can even be higher in the first few years of your employment. This is why you must ensure that you always maintain an adequate surplus to avoid chaos in times of fluctuating expenses and repay your EMIs on time. Try to save extra if you are earning enough. Always remember that timely repayments can help you strengthen your creditworthiness.
— The writer is Co-founder & CEO, Myloancare.in
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