Paying the Education Loan off can make your life a lot simpler, if you have your repayment plan in place. You get to save a lot on the unnecessary interest and that makes a lot of sense, doesn’t it? The best way to figure out a repayment strategy is by talking to your lender and exploring all the available options which can help you to plan things better.
Besides, the repayment of interest should be started in the moratorium period itself, which will reduce the EMIs to a large extent. The bank starts accruing simple interest from the date of disbursement on the amount disbursed to you as loan, which keeps adding up your loan amount increasing the debt burden. Many banks also give a 1 per cent interest concession to those who repay the interest debited during the moratorium period.
Here are some of the other tips to efficiently manage your education loan:
- Look for possible scholarships:
Before you start the search for a suitable Education Loan, you need to explore all the possible scholarship options. It’s always better to look for opportunities that can help you save a lot of hard-earned money and effort.
- Choose the right Education Loan:
Since you’ll be surrounded by a lot of options, choosing the right Education Loan will most likely be one of your biggest challenges. Before taking the final call, you need to analyse your needs well and choose an option accordingly. For instance, if you’re planning to study abroad, you’re likely to need more money compared to taking up a course in India. In addition, getting a loan that has better repayment flexibility would make more sense for you, wouldn’t it? So, making a smart choice, in the beginning, can significantly help you out later.
- Set a comfortable EMI on realistic grounds:
Setting a lower EMI for a longer duration might just be a better option than ambitiously trying to pay off the loan early. No doubt, paying off the loan early is the better option, but not by making unrealistic plans or ignoring your basic lifestyle expenses. Rather you need to prioritise your finances and be well planned in advance.
- Stay updated on the Interest Rate fluctuations:
Education loan in India offers floating rate of interest, which means the applicable rate of interest is (Base rate+ margin). Thus, if the bank rate decreases or increases by say 25 basis points, then your actual rate of interest will also change by 0.25%. So, it is very essential to stay updated on the current rate of interest on your loan.
- Prefer a loan from PSU Banks:
PSU banks typically offer loans at lower rates than private banks. In addition, private banks impose heavy penalties on pre-payment of loan i.e. paying it ahead of schedule. Although, it serves as a great way to reduce your interest burden. PSU banks on the other hand, are very lenient in this regard.
- Explore ways to earn more:
If you’re really serious about considering this option, you can find a couple of websites that offer you freelancing jobs according to your job profile. Although it won’t be easy, you’ll get to get rid of that Education Loan real quick. That should motivate you enough to consider this option. Even if that means starting with a job that’s not too great according to your current post, go for it. After all, if you or your child will starts earning more, not only will it help you with the repayment of the existing loan but will also improve your lifestyle. In addition, will also get to acquire new skills and talents.
- Avoid unnecessary expenses:
To repay your loans faster, you must bring some effective changes to your lifestyle. These might include things like- making a budget at the start of every month and strictly adhering to it and controlling any unwanted expenses. You need to leave some room for emergency expenses as well. Plan better so that you don’t feel the burden of EMI at the end of the month.
In addition, repayment of interest on Education Loan is eligible for tax benefit under Section 80E of the Income Tax Act, 2016 for seven consecutive assessment years after the repayment starts.
However, as a prudent borrower, if you feel that you will be unable to repay the bank loan, you must inform the bank of the situation well in advance. Based on the validity of the case and prevailing scenario, banks can come up one of the following solutions:
- Increase the loan tenure:
Education loans come with tenures of 5 to 7 years. If the bank feels that your crisis situation is temporary and that you will start earning well in some time, they may agree to increase the tenure of the loan to up to 10 years or 15 years which will reduce the EMI. A lower EMI may seem affordable, but you will end up paying a higher interest overall, for the full tenure of the loan if you choose to extend the tenure.
- Extend moratorium period:
Although this is rare, not completely impossible. If you have a good credit background, the reason for not getting a job is genuine and you have good negotiation skills, the bank may just agree to extend your moratorium period by six months to 1 year. This can bring you a huge relief from the EMI payments. But, since you will continue to pay interest, your interest outflow will be quite high.
- Income linked repayment:
Another option to bargain with the bank is to ask for an income-linked repayment scheme. Banks abroad offer an income-sensitive repayment model where EMIs increase (or decrease) with income. However, Indian banks, at present, has no provision to adopt any such model.
Statistically, in recent years, along with the increase in lending, there has been a sharp rise in defaults too. If your EMIs are overdue for 90 days, the bank classifies it as a non-performing asset. Avoiding payments or not informing the bank can be quite harmful to your credit health, as this can affect your credit standing adversely.
Considering that there will be many more important loans you would want to borrow later in life, it is always better to keep the bank informed of the situation of non-payment of education loan and work out a solution which best suits both you and the bank.