Smart Ways to Manage Your Education Loan

Take a look at this scenario:

Vaibhav graduates from a premium B-school, with a substantial education loan against his name, and gets recruited by a well-known MNC. However, the financial burden on his shoulders — even though he bags a well-paying job — is immense. Usually for the middle class, a degree from a premier B-school comes along with a heavy loan burden. Vaibhav had applied for an education loan for MBA for a sum of Rs. 15 lakhs . The interest rate of the loan was 13% and the loan tenure was 8 years. Now, after being placed, Vaibhav will have to pay a sum of Rs. 25,210 every month as EMI toward loan repayment.

Consider the other expenses a person living in a metropolitan city would have to undertake:

Renting a house at about Rs.12,000/pm, which includes electricity charges and maintenance; commuting and food expenses, amounting to Rs. 8,000/pm; an entertainment budget of Rs. 6000/pm for gadgets, clothing and partying with friends; a life insurance policy that demands Rs. 800/pm.

If his monthly salary is Rs. 60,000 — he is left with a small amount after taking care of all the expenses. He can use this sum for investment towards short-term financial goals.

Repaying the education loan, along with the bills, is one of the most daunting tasks one undertakes which is why it is important to plan meticulously.

1. Utilize the moratorium periodThe loan grant is easy but paying it off can prove challenging. We suggest you start repaying early by utilizing the moratorium period which is usually one year after the end of studies. So, even while you are still in college, start repaying the interest amount. This move will reduce your EMI amount, albeit slightly, as the interest rate will come down by 1% if you choose this payment option. As a result, the pressure of the interest which piles up with each passing day will ease to some extent. A comfortable EMI will make life easier for you.

2. Do not opt for over ambitious EMIsIn your haste to get over with the loan, avoid opting for a very high EMI amount. It would be sensible to choose EMIs you can manage to pay even if your salary is lower than what you had dreamt of. Opt for an EMI that you can manage keeping in mind other living expenses.

3. Optimize your internship stipend and annual bonusYou can accelerate loan repayment by channelizing your internship stipend and annual bonus (once you have a full-time job) towards that end. However, keep in mind that some banks and lending institutions charge a pre-payment penalty. So, before making any part or full pre-payment, assess the financial benefit of doing it. If you are earning enough and have money left over after paying the EMI, save the money to create a buffer. This will help you to repay the loan in case the interest rate rises.

After you have taken an education loan, paying back requires careful planning. It is important that you do not default. A default can spoil your credit score (if the loan is under your name) as well as that of your guarantor’s, if any.