Posted on: July 10, 2017

Practical Guide To Education Loan Repayment

education loan repayment

When Sachin Tiwari finished his Masters in Business Administration (MBA) in 2010, he owed Rs 6 lakh to the bank towards his education loan. Not wanting to default on his loan or let the interest component balloon, he decided to make each day count and get rid of his education loan as fast as possible. Finally in 2015, he managed to close his loan.


How did he repay the loan?

 


Once out of business school, he got a job as a Marketing Executive at a small company in Gurgaon, with a take home salary of Rs. 25,000. He shared his personal experience with us as to how he managed to repay the loan in 5 years instead of the 7 years outlined in the loan contract.


Speaking to Paisabazaar.com, Sachin said, “It’s very important to set realistic targets because default should never be an option”. Let’s look at how he managed to achieve this.
 

  1. Prioritize expenditure:
Sachin emphasizes on prioritizing expenditure. This activity will help you alter your spending habits and focus where required. An easy way to go about it is classifying your expense in to three categories:fixed expenses, daily expenses, and avoidable expenses. Once you have done this, see how much you can save by working on the avoidable expenses.
 
  1. Start paying immediately:
It’s best to start repaying immediately even during the holiday period. This helped Sachin as it enabled him to close his loan before the tenure. As a result, he was able to save money on interest amount as well. Sachin was able to achieve this as he had identified the areas where he could cut down on expenditure.
 
  1. Live below your means:
Living below your means will help you control your expenditure and enable you to repay faster and efficiently. “When I got out of business school, I managed to save additional money each month and by the time my salary increased, I was saving an average of Rs. 2750 monthly. So instead of paying my regular EMI of Rs 10,600, I used my savings towards this end. By the time my loan ended, I had paid an average of Rs 13,350 each month as EMI.” A small increase in EMI helped Sachin close his loan 2 years before the tenure. This also helped him save close to Rs. 90,000 (approx).
 
  1. Build a ‘rainy day’ fund:
Sachin emphasizes on the importance of building a rainy day fund. While repaying education loan debt was Sachin’s top priority, the focus was also on building a corpus, which could see him through during tough times. He started with small savings of Rs 1,000 each month and as his salary grew, he increased the contribution to his ‘rainy day’ fund and education loan repayment proportionately.
 
  1. Share an apartment:
Sachin told us that the first thing he observed about the people in Gurgaon was the spendthrift attitude. They were usually people who, just like Sachin, were in the early days of their career. “I was a typical small-town boy, when I saw these people initially I was impressed but soon discovered the financial woes they had got themselves entangled in,” says Sachin. Adding further he said, “I wanted to have fun too but repaying the loan was absolutely paramount, so I started cutting corners and took a shared accommodation.” This move worked well for Sachin as it allowed him to focus squarely on the loan repayment. By sharing an accommodation, he managed to save not only on rent but also on items such as groceries and utility bills.
 

 

In essence, loan repayment goes beyond knowing what to do and involves what not to do as well!
 
Sachin’s Final Take:

 

During the first year of your job, things can be financially tough as our means are limited and liabilities are high. However, the idea is to maintain discipline. Once you form and follow a financial routine and your salary starts to head north, you will soon find loan repayment to be the least of your worries.  The two tables below explains my case in numbers and shows how much have I saved by following the above measures.


Scenario 1: What Sachin was required to do?
 

Monthly Salary Rs 25,000/-
 Loan Amount Rs 6,00,000/-
EMI Rs 10,600/-
Rate of Interest 12%
Loan Tenure 7 years
Interest Pay Out Rs 2,89,700
Total Repayment Rs 8,89,700/-

Scenario 2: What Sachin did?
 

Monthly Salary Rs 25,000/-
Loan Amount Rs 6,00,000/-
EMI Rs 13,350
Rate of Interest 12%
Loan Tenure 5 years
Interest Pay Out Rs 2,00,800/-
Total Repayment Rs 8,00,800/-
Saving (Scenario 1 total repayment – Scenario 2 total repayment) 8,89,700 – 8,00,800 = Rs 88,900/-

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