With upskilling the norm nowadays, many of us consider supplementing our education with additional degrees domestically or abroad. However, funding higher education, especially overseas, can be a major financial burden. When borrowing from family is not feasible, a bank loan is the only way to fulfil those scholastic aspirations.
Since no one wants to spend a large portion of their monthly income on EMIs, paying off your education loan quickly without breaking the bank would be the ideal way to close the chapter on your education. However, navigating the twists and turns of prepayments and EMIs could stymie those best efforts, so we’ve come up with a few tips to help you clear that student debt quickly without stressing your bank balance.
Get Complete Clarity On Your Loan
Figuring out exactly how much you will owe over the course of your loan tenure is the first step to planning a repayment schedule. In addition to your principal amount and the interest chargeable, there are other supplementary charges such as processing fees, taxes etc. that are added to your loan. It’s a good idea to calculate all the charges associated with your loan so you don’t have extra costs to deal with when you begin making repayments.
Education loans come with moratoriums that give you a breather from paying EMIs till you start working. This moratorium period is usually the duration of the course. However, banks charge simple interest during this time, which is then added to your EMIs.
For example, say you’ve taken a loan of Rs.20 lakh for a 2-year course and the bank is charging you simple interest of 5% p.a. on this amount. Effectively, the bank is charging you 5% each year on Rs.10 lakh. Thus, the simple interest payable is Rs.50,000 each year, or Rs.1 lakh for 2 years. This amount is added to your total loan amount once you begin paying EMIs.
Try To Start Payments While Studying
To make a dent in the total amount payable, you could try paying off the simple interest while studying (i.e. during the moratorium period). This will help reduce your overall debt burden by Rs.1 lakh (on the loan in the example above) even before you begin your EMI payments. Moreover, many banks offer interest concessions of up to 1% if you start payments during the moratorium period.
You can pay off the simple interest in a lump sum at the end of each course year, or you can try to pay each month, depending on your finances at that point. So how do you keep up with payments while balancing coursework and assignments?
Part-time Jobs: Most of us take up part-time work or ‘side hustles’ to earn a little extra cash when studying. You can put the money earned towards paying off the Rs. 50,000 you owe each year and reduce your overall interest payments.
Family And friends: Got a little extra cash from relatives on birthdays/festivals? You can use this towards paying off your interest amount as well. Think Rs.5,000 won’t make much of a difference? When clubbed with money from freelance/part-time work, a Diwali/birthday cash gift can save you paying higher interest later. Or else you can aim to save up as much as possible from the funds your family sends you by controlling wasteful spends.
Be Financially Disciplined When You Start Earning
Putting aside a set amount each month by carefully balancing your budget is key to maintaining your EMIs and having enough to get by for the month. It might mean living the student lifestyle for a bit longer than you anticipated (or want to), but cutting back on expenses and putting every extra rupee towards your loan will reap rewards later.
Budget each month by calculating your key expenses- rent, bills, EMIs and basic living expenses. Ensure you have enough to cover these essentials every month. Continuing to stay in cost-effective shared accommodation, limiting shopping binges and excessive food ordering, using public transport more than cabs and keeping a tab on home entertainment spends (like multiple streaming platforms, pricey internet connections, etc.) and gaming-related expenses are tried-and-tested ways to boost savings.
Aim To Pay More Than Your EMI
Paying more than your EMI instalment each month will cut down on your loan tenure significantly. Paying even Rs.1,000 extra each month will lower your outstanding amount by Rs.12,000 a year! Consequently, the compound interest on the outstanding will also reduce concurrently and help you pay off the principal and interest quicker. A word of caution, however. It is advisable to check with your bank regarding paying more than your EMI each month, since there might be prepayment charges levied on the extra amount you pay.
Use Windfalls To Repay In Chunks
So you’ve landed your first job and are looking at a tidy bonus or raise for your efforts. Instead of splurging on something for yourself, put that towards increasing your EMIs. Got a tax refund? Put this towards your monthly payments as well. Using an unexpected windfall to pay off a larger chunk of your outstanding will reduce your overall interest and help you save on interest payments.
Make An Informed Call About Prepayment
This is a bit of a risk, since you will be debt-free faster but might have to cough up extra through prepayment charges and fees. Most banks charge a penalty for prepaying a loan, with penalties depending on the quantum of loan.
Weighing the opportunity cost of prepayment versus sticking to your payment schedule is something to consider before you prepay. Since you stand to receive tax deductions on your education loan under Section 80E, you will lose these benefits if you prepay.
Conversely, since education loans are floating rate loans, there is a chance your interest rate could increase during your loan tenure. Most banks pegged such loans to the MCLR (Marginal Cost of Funs-based Lending Rate), with an added 1-2% depending on the loan amount. Many are now switching to a repo rate-linked system. Depending on economic factors, this rate could rise/fall during your loan tenure and could increase your debt burden.
To avoid hefty penalties without increasing your payouts, evaluate the affordability outstanding amount payable before you decide on prepayment.
Using a combination of the above tips can go a long way in helping you become debt-free sooner without having to go without money at the end of each month. Moreover, maintaining a good repayment record will boost your credit score for the future, giving you access to better rates and deals as well.
The writer is CEO, BankBazaar.com
BankBazaar.com is India’s leading online marketplace for loans and credit cards.