Role of Education loan
A good education is the dream of all citizens and their families. The state accords primacy to education by making it free up to high school. From then onwards, students have to manage their own education by enrolling in various colleges and universities. But, cost of education is going up and it is becoming difficult for people with modest means to fund the costs of education, especially higher education.
Besides scholarships, grants and endowments, students have access to funds for meeting the cost of education through education loans extended by various financial institutions, banks and NBFCs such as Tata Capital. These loans are available to students for pursuing higher education both in India and abroad. Typically, personal loan for education loan in India comes with lower interest rates and have liberal terms for repayment.
While it is easy to obtain a loan, the repayment is the real crux and in some cases, repayment can extend up to 14 years. Although the education loan interest rate is much lower than for other loans, it nevertheless adds to the repayment burden. You are committed to this loan for a long time and it is important that you try to pay off the loan as soon as possible.
We present below 9 tips that you can follow to pay off your education loan as soon as possible.
1. Pay off simple interest during course of study
One of the important facilities of the education loan is the fact that simple interest applies on the quantum of loan during the course of study. If you don’t pay interest, it will accumulate and added on to the principal when the loan is recast after completion of studies. From then, you will pay compound interest. It is smart to pay off the interest as and when it becomes due.
2. Earn while you study
In today’s interconnected world, there are hundreds of jobs on the World Wide Web that you can take up on a part-time basis. You need to spare one or two hours every day and use the earnings to pay off part of the loan. This will ease your burden on the loan amount you will finally pay at the end of studies.
3. Establish prudence in living standards
It is easy to get carried away by peer pressure and spend money on things that are unnecessary. If you draw the line on impulse purchase and keep a check on ‘keeping up with the Joneses’ syndrome, you can use the savings to repay the loan.
4. Create a repayment fund
Indians are lucky in the sense that families rally behind students and shower gifts on them. If you receive monetary gifts make it your priority to use these gifts to create a loan repayment fund. The amount could swell to a tidy sum during your college days, which you can use to repay part of the loan.
5. Plan your EMIs carefully
Once studies are over, the loan is recast and you can pay off the loan in about 7 years. NBFCs such as Tata Capital offer a variety of EMI options from which you can choose your desired option. It makes sense to opt for a step-up EMI option that enables you to increase the EMI amount every year. This helps you to clear the loan faster. It is also less burdensome because in this option you pay lesser EMI when you start out on your job and your pay is low. As you rise, your income also goes up and you can afford a higher EMI.
6. Take insurance
Although it costs to take a term insurance, it helps your family in the unfortunate event of death to clear the education loan.
7. Use windfall gains to prepay loan
As you progress in your job you will discover various benefits. You may earn bonus or receive some monetary awards. Use these amounts to prepay your loan.
8. Tap your employer for help in repaying the loan
When you seek employment, talk about your education loan with your company and find out how it can help you in mitigating your loan commitment. Employers can help you with an interest free loan to pay a lump sum every year towards your loan.
9. Make tax benefits work for you
Education loans come with tax benefits for payment of interest without any limit. Thus, it is in your interest to check the amount saved by way of taxes. This means that you can reduce the interest amount from your taxable income. It makes good sense to find out how much this is and use it to repay part of the loan.
Education loans are excellent means of funding cost of higher education. It devolves on you to use the loan carefully. You need to pull out all stops to ensure you repay the loan as quickly as possible. If you follow the steps recounted above, you will clear your education loan faster.