Education loan: Timely repayment is key

Written by Anil Rego | Updated: Dec 13 2013, 08:19am hrs
Most students dream of going abroad or joining one of the premier institutes in India to pursue higher education.

However, this is usually an expensive proposition and, sometimes, out of reach for those belonging to the middle class. The best way to have access to all higher education options is via student loans. Nearly all banks offer preferential rates and terms for students looking to pursue higher education and no collateral is required for loans of less than R4 lakh.

There are several steps to paying off a student loan once you get a job. The first is to understand that the student or his/her guardian is liable to pay interest on the loan for the duration of education that is, till the time the student is studying, the interest component of the loan must be serviced. The other aspect is that EMIs start after the first year of course completion or after six months from the date of getting the job, whichever is earlier.

Generally, students get loans at a lower rate compared to most other loans. Keep paying at least the interest component, since failure to do so may result in the bank considering this also as loan and charging interest on the interest component.

Once you get your first job, ensure that you make a strict budget and adhere to it. Prepare a budget based on past financials and predict the probable future income. Also, it is important to factor in inflation into the budget. One of the major mistakes made while budgeting is over- or under-valuing an expense this could lead to lower-than-optimum savings. One should study spending patterns over a period of time, and learn from these to correctly estimate the budget. This will ensure that there is enough money each month for living expenses, savings and repayment of loan.

There may also be cases of employers offering to pay off bank loans in lieu of signing on a bonus or in return for a bond that you will work there for a certain number of years. While this can go a long way in easing ones loan burden, it is advisable to be cautious as there might be terms and conditions that the employer may include that could be detrimental in the long run always check the fine print.

Also, the loan repayment process should be automated (this is called an auto-debit facility) the bank directly deducts the EMIs from your bank account each month on a predetermined date. Some banks may even offer a discount on the interest rate on your loan if you opt for the EMI facility.

If you get placed in a well-paying job, you can reduce your loan repayment time period. This will lead to higher EMIs, but lower overall interest payments. This is because you pay more of the principal amount rather than paying more as interest. This will be beneficial in the long run as the total repayment will come down substantially.

Remember to take all possible deductions available under the Income Tax Act. Interest paid on these loans are also fully deductible from taxable income under Section 80E, up to eight continuous years, starting from the year in which the interest is first paid.

The writer is CEO & founder, Right Horizons