Banks offer education loans to students wishing to pursue promising courses in good universities. Once the course is over and the person takes up a job, the first question that he is faced with is whether to start investing or paying off the loan immediately. Both options have their own pros and, sometimes, one can interlink the two to make the most of the situation.

Repay first: Have a plan in place
Most education loan repayments begin after a moratorium period, which is one year after the end of studies or six months after securing employment, whichever is earlier. The loan has to be repaid thereafter, within the specified tenure ranging from five to 15 years. If the student fails to complete the study programme within the stipulated period, the bank may provide an extension of up to two years, excluding the moratorium period, on a case-to-case basis.

One must consider paying simple interest on the principal during the study period, as this will reduce the equated monthly instalments (EMIs) in the long run. Moreover, many banks give a 1% interest concession to those who repay the interest during the moratorium period. Meticulous planning is a must. It is necessary to keep track of the amount owed, interest rate, term of the loan, minimum monthly payment and repayment date.

The interest paid on the education loan is tax-deductible as per provisions of Section 80E of the Income Tax Act, 1961. The deduction is allowed only for repayment of interest on the education loan and not for the principal amount, and is applicable for courses pursued both in India and overseas. The deduction can be claimed for a period stretching eight years, beginning from the year in which the interest is paid on the loan, or until the repayment of interest, whichever is earlier. So, it will be wise to start paying off one’s loans fast, to take maximum advantage of tax benefits in the initial years when one has no other tax-saving instruments like home loan, insurance, etc.

Invest first, EMI later
Some people, however, prefer to take maximum advantage of the moratorium period and postpone the repayment as far as possible to keep the EMI burden at bay during the initial years. Investing for the future is perhaps the most important aspect of work life. You need to think about your retirement right from the time you start working. However, the bottom line of taking a loan is that it has to be repaid. So, why should you postpone for the sake of convenience and care-free initial years and, thereby, allow the interest rate to accumulate?

It is true that during the early years, a person may not want to worry about paying more on interest or even a higher rate. But a penny saved is a penny earned for your secure future.

There are many flexible investment plans like buying stocks or mutual fund SIPs that one can choose in terms of flexible investment without ignoring your EMIs completely. And remember, this is the best time of your life to play with equity investments, which are ‘high-risk, high-return’ options. If played safely, you can earn high returns on your investments.

So, the sooner you start repayment, the better it is — an outstanding loan will not only accumulate interest, but also affect your Cibil score, which can negatively impact your future loan applications. Moreover, the interest part of the EMI for the education loan is eligible for tax deduction under Section 80(E) of the Income Tax Act.

Expenses in the initial earning years or bachelorhood are generally high and most youngsters are left with little to save during this time. So, it is better to take the loan burden willingly on your shoulders because the forced payment will help you get out of debt at the earliest.

Getting a loan is only half of the picture; should one pre-pay it or get started on investments is the dilemma that stares in the face of every young person. If your education loan is prepaid fast, you are in a better position to start investing. The sooner you start that, the more time you have for growing your portfolio. But remember, never take another loan to pay off your education loan.

By Adhil Shetty

The writer is CEO, BankBazaar.com

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