Education loans play an important role in a student’s education, especially when tuition fees and living expenses exceed family income. While a student loan can be a saviour, understanding effective loan repayment strategies are equally important to prevent long-term financial stress. In this article, we will explore Abhigyan’s journey of securing and repaying a study loan while demonstrating how smart financial decisions, discipline, and strategic planning helped him repay his student loan faster while managing other things in life.
Background:
Abhigyan, a studious student from a rural background, always dreamed of pursuing higher education and fortunately he secured admission to ICFAI Business School, Hyderabad, for an MBA degree. However, the high academic cost including tuition fees, books, accommodation, etc. remained a challenge. His family couldn’t afford the expenses and his dream seemed unattainable. To solve this problem, he started exploring various finance options and applied for an education loan of ₹8 lakhs from a public sector bank, which covered his tuition fees and other related expenses.
The study loan of ₹8,00,000 was taken at an annual interest rate of 9% for a repayment period of 7 years, which included a 1-year moratorium period. The estimated monthly EMI for this loan came as approximately ₹12,800. While this education loan gave him a breath of relief, the loan repayment process came up as an entirely new challenge.
Education Loan Repayment Journey:
Through Abhigyan’s journey I will walk you through the strategies a student can adapt to plan repayment of an education loan:
- Moratorium Period: This refers to the time when students can plan and prepare a strategy for repayment of the loan. Abhigyan completed his MBA successfully and entered the moratorium period, a grace period where no repayment of education loan was required for a year after the course completion. However, during this time, interest on the study loan continued to accrue, which would be added to the principal. Abhigyan used this period smartly by learning about the education loan repayment schedule, interest structure, and strategies for early repayment. He also projected his income after securing a job and planned how much he could afford to repay towards the study loan amount each month.
- Creating Repayment Plan: Abhigyam secured a job and started earning ₹50,000 per month with 50% allocated for his living expenses in Hyderabad. He saved the remaining amount of ₹25,000 for his study loan repayment and savings. This helped him to manage his lifestyle while saving money for expenses. His financial discipline approach increased his chances of loan repayment faster. Abhigyan prioritised paying the EMI of ₹12,800 per month timely to ensure that he stayed current with his student loan obligations. The on time payments saved him from additional penalties and increasing interest charges.
- Prepayments of Student Loan: As Abhigyan continued working efficiently, he received a bonus of ₹60,000. Instead of spending it blindly, he made a part prepayment of ₹50,000 towards his loan principal amount. This diligent approach helped him in reducing the principal amount of the education loan i.e. lower EMIs in future.
While repaying for an education loan, prepayments become the best choice to minimize the total interest burden. Abhigyam made sure that his study loan repayments remained manageable and that the debt was paid off faster by making advance payment of principal amount.
- Increase EMI Contributions: As the time passed, Abhigyan received an increment in salary. His monthly income increased to ₹65,000 and he decided to increase his monthly EMI contribution to ₹15,000. This helped him pay off his education loan faster and reduced interest payments.
The decision to increase the EMI shortened his education loan tenure and expedited the repayment of education loan. - Tax Exemptions Under Section 80E of the Income Tax Act: Abhigyan made the most of tax exemptions which gave him deduction on the interest paid towards an education loan. He reduced his taxable income, and thereby his tax liability, by claiming deductions on his study loan interest. This provided him additional funds which could be reinvested into his loan repayment or used for other personal expenses.
- Extra Contributions: Abhigyan explored other income possibilities apart from his job. He started giving financial consultation in the rural areas, which resulted in a side income of ₹10,000 per month. He added ₹5,000 to his contribution towards the study loan. These extra contributions accelerated his education loan repayment and helped him to pay off his debt even faster.
End of Education Loan Repayment Journey
The disciplined approach, strategic planning, and proactive decision-making helped Abhigyan successfully pay his education loan of ₹8 lakh in just 5 years instead of its 7 years. By making prepayments, increasing his EMI over time, utilizing tax benefits, and earning extra income through freelancing, Abhigyan was able to save a substantial amount in interest and clear his education loan ahead of schedule.
Also Read: Education Loan Moratorium Period
Strategies for Successful Education Loan Repayment
Repaying an education loan can seem difficult, but with a well-planned approach, it can be managed effectively. Here are some successful education loan repayment strategies:
- Create a Realistic Budget: Develop a budget that outlines your income and expenditure. Allocate a specific amount each month towards your loan repayment, ensuring it aligns with your financial abilities. Cut off unnecessary expenses and prioritize essential expenses to free up more funds for loan repayment.
- Understand Loan Terms: Thoroughly understand the education loan terms including the interest rate either fixed or variable, repayment schedule, any grace periods, and potential penalties for late payments. Being aware of these details is very important while you avail a student loan.
- Start Repaying Early (If Possible): Even during the moratorium period, if your financial situation allows, consider making prepayments towards the principal. This can significantly reduce the overall interest you accrue and shorten the education loan tenure.
- Explore Repayment Options: Many lenders offer various repayment options, such as extended repayment plans or graduated payment plans. Research all the potential options and choose the one that best suits your current and projected financial condition.
- Consider Refinancing (If Applicable): If education loan interest rates have dropped since you took out your loan, or if you find a lender offering better terms, consider refinancing. This can potentially lower your monthly payments and save you money over the life of the loan.
- Maintain a Good Credit Score: A good credit score can be beneficial if you need to refinance your education loan or apply for other credit in the future. Try to make payments on time for your education loan and other debts to maintain a healthy credit history.
Also Read: How to Maintain a Good Credit Score for Education Loan?
Frequently Asked Questions (FAQs)
When do I have to start repaying my education loan?
The repayment of an education loan depends on your loan terms. Generally, the repayment period begins after a moratorium period, also known as a grace period, following the completion of your studies. Check your loan agreement for the specific details related to a study loan.
What should I do if I am facing financial difficulties and cannot make my loan payments?
It is advised to contact your lender immediately for this. They may be able to offer solutions such as forbearance or restructuring your student loan.
Can I make prepayments towards my education loan?
Yes, most lenders allow prepayments of the study loan. However, some may have prepayment penalties. It is advisable to check with your lender about their prepayment policies.
What are the tax benefits available on education loan interest payments?
It is important to consult a tax advisor or refer to relevant tax regulations to understand the specific tax benefits available in your region.
What is the difference between a fixed and variable interest rate?
A fixed interest rate remains the same throughout the loan tenure, while a variable interest rate can fluctuate based on market conditions.