Higher education has become pretty expensive these days. More and more people are finding it difficult to fund the cost and hence are resorting to education loans. If you have got admission in your dream college and are looking for education loan, it is important that you properly assess the various options available and take into account such factors as interest rates, eligible loan amount, repayment options and prepayment options available.
But what should be the ideal loan tenure? Should you choose a longer tenure as you are not sure what kind of job you will land into or what will be your paycheck? Or is opting for a shorter tenure more beneficial?
Ideally, the shorter the tenure of loan better it is. Let us see why.
Total interest outgo will be higher
Any loan is a liability so it’s better to get rid of it as soon as possible. Longer the duration, higher will be the total interest amount. Some people are not sure of paying high EMI in the early years of their career so to be on the safer side they opt for a long duration loan but this will have an adverse effect on your pocket. Let’s calculate to give you a better idea.
So, a loan of Rs 15 lakh at 13% for 10 years will have an EMI of Rs 22,397 but the same loan for tenure of 15 years will bring down your EMI to Rs 17,574. However, your total interest outgo will shoot up. For the 10-year loan, you will pay a total interest amount of Rs 11.88 lakh whereas in the other case, the total interest outgo will be Rs 19.16 lakh.
Notice the difference, it is huge!
However, it’s a tough call to make, as you may opt for a shorter duration loan but there is a possibility that you might not be able to pay your loan EMI if you don’t get a high paying job in the initial years. So, even if you opt for higher tenure loan, try to prepay the loan with any surplus money you have.
Say bye to tax benefits
You can avail a deduction on the entire amount of interest paid on education loan under Section 80E of the Income Tax Act. However, there are two conditions to it:
1. Loan should be taken from any of the scheduled banks in India or any Gazetted financial institutions.
2. Deduction can be availed only for the initial assessment years plus the next seven assessment years or until the interest is paid in full, whichever is earlier. Basically, you can avail the deduction for a maximum of eight years only.
So, if you increase the tenure of the loan to reduce the EMI burden, you will have to forgo the tax benefit.
Investment planning will lose focus
A loan of longer duration will adversely affect your ability to save and invest as you will continue to be under the EMI burden. After you get a job, you will not only need to pay toward your EMI but will also have to invest for future goals. As a result, your investment planning will take a hit as finances will be stretched thin.
In essence, get rid of your education loan as soon as possible so that you can invest more in your present and future.
Naveen Kukreja is Managing Director Paisabazaar.com. The views expressed here are personal.