Should you pre-pay your education loan? Find out

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November 29, 2020 11:57 AM

If the EMI outgo amounts to 50 per cent of your current monthly salary, then you should definitely consider paying off the loan at the earliest.

education loan, top up loan, money management, financial mistakes, common financial mistakes, common financial mistakes college students make, how to avoid mistakes, Low savings, no emergency fund,   Mishandling education loans, schools reopen, schools reopen in Delhi, schools reopen in India, Education Loan, Personal Loan, Education Loan Vs Personal Loan, higher education, How to fund higher education, personal loan interest rates, education loan interest rates, loan tenure, Tax exemptions, schools in India, schools and colleges reopen, Delhi, school fees hike, COVID-19, Directorate of Education, Delhi government, school fess, schoool fee regulations,Paying off your loan early keeps your credit score steady. An outstanding balance on your education loan can reduce your chances of getting a bigger loan such as a home loan sanctioned in the future.

At the beginning of one’s career, which is mostly in the ’20s, people with an education loan that’s waiting to be paid off, should take it seriously. Experts say one must weighing their priorities, as soon as they start earning. Unlike a home loan or a car loan, an education loan is not a physical asset investment, it is an investment in human capital, wherein the borrowing cost may not be at par with the asset creation. Hence, experts say if one has the opportunity to pre-pay the loan, he/she should opt for it.

Pre-payment of a loan means clearing the loan before the stipulated period of time. Pre-payment means the borrower needs to pay extra towards the monthly EMI, reducing the interest to be paid to the bank, hence, cutting down his/her long-term dues. Pre-payment of a loan can be made either partially or entirely, depending on the borrower.

An education loan usually attracts an interest rate ranging from 11 per cent to 15.5 per cent. With that, if the EMI outgo amounts to 50 per cent of one’s current monthly salary, then according to experts one should definitely consider paying off the loan at the earliest.

Additionally, if your education loan is at a floating rate of interest, then your EMIs could go up unpredictably disrupting your monthly allocations for paying off debts and investment. Hence, getting the burden as soon as possible can help you focus on creating wealth, and other long term goals. Furthermore, if you think after landing a high-paying job, you will clear your dues altogether, experts say that is not the right approach. Borrowers should not delay paying off their education loan, as employment in the current circumstance is scarce especially in this difficult economy, and salaries are competitive.

Also, paying off your loan early keeps your credit score steady. An outstanding balance on your education loan can reduce your chances of getting a bigger loan such as a home loan sanctioned in the future. It is so because banks and other financial lenders look at a borrower’s credit scores first before approving any kind of credit.

Having said that, keep in mind that some banks charge a penalty between 2 to 3 per cent on pre-payment of education loans with a fixed interest rate, but as a borrower, you will gain from it in the long run.

On the other hand, you will have to trade off the deduction under Section 80E of the Income Tax Act, that you were enjoying on the interest payment of the education loan if you decide to pay off the loan early. But by paying off your loan early, if you are able to save an extra buck, you could use the money towards your long term goals.

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