With growing competition and aspirations of a successful career, today students and professionals want to pursue quality education, especially at premier institutes. However, the cost of education is increasing and in spite of parents saving for their child’s education, there is usually a shortfall. Therefore, education loan plays a vital role in bridging this gap. At the same time, it is important to carefully plan and manage your education finance to make your repayment journey smoother.
Choose the right education loan
Before opting for an education loan, it is important to collate all relevant information right from the documentation processes, eligibility criteria, fluctuations in interest rates, repayment options, etc. By being well-versed and aware of this information, one can plan his/her future financial goals. It is good to choose a loan that offers repayment flexibility, relaxed payment options, lower interest rates among other benefits.
Maintain a good credit score
Repaying education loan on time will have a positive impact both on the student’s and co-borrowers (mostly parents’) credit score. A good credit score enables customers with competitive advantages to avail any future loans (home loan, car loan, personal loan, etc.).
Take your loan in small amounts
Tuition fees is paid in tranches at the end of each academic cycle, be it a year or a semester. Therefore, it is prudent for you to draw your loan amount in respective tranches instead of one single instance. This helps you in saving interest amount, since interest is levied by the lender only on the amount which has been disbursed.
Devise a repayment strategy
Repayment of an education loan generally starts six months to one year after the completion of studies. The borrower must have a repayment strategy in place before the equated monthly instalment (EMI) starts. During the study period, the lender generally charges simple interest or partial interest on the loan. This payment of simple/partial interest during the study period enables the student to reduce the EMIs for future repayments post the completion of studies. Therefore, it is advisable to repay some interest during the study period to lower future EMIs.
Manage your finances
To be able to complete your education loan repayment, managing your finances should be the priority. It is important to properly understand and plan your income and create a structured plan for EMIs, savings, investments, insurance and other expenses. While it may not be possible to increase the income amount, expenses can definitely be planned well in advance. An easy way to go about classifying your expenses is to segregating the expenses into three categories: fixed/ essential expenses, daily expenses and other expenses. Once you have done this, see how much you can save by working on these expenses. The student must fix and follow an expense budget for every month.
It is wise to opt for a health cover and personal accident policy to prevent any loss of income in case of any accident, medical emergency or medical treatment.
Many students tend to prepay their loans. However, this is not always the most economical option. In your hurry to get over with the loan, avoid opting for a very high EMI amount by lowering your tenure. Choose EMIs which you can manage comfortably. EMI to monthly income ratio should not be more than 40-50%.
Critical to save and invest
In the process of prepaying the education loan, do not ignore your investments. If you start saving and investing from the initial years of your career, it will give you benefits of compounding. Build a corpus to partly prepay the loan, especially if you have taken a long-tenure loan, say, for five or seven years. Make sure to invest at least 15-20% of your salary for future goals.
The writer is CEO,
Avanse Financial Services