Education is perhaps an
individual’s most precious resource today. In fact, nowadays education is at
times equated to an investment, which in all truth it is. However, if we purely
take perspective at education as an investment point of view, the price of
education at times requires you to take loans from banks or other sources,
which require you to pay off the debt after your “investment” or education
starts bearing fruits. As easy as loan grant sounds, the more difficult it can
be to pay off. However with careful planning and timely repayments, one
prevents himself/herself from coming under what is called “debt pressure”.
Should you prepay your education loan?
Education loan is basically an
amount bank has paid on your behalf. So with every passing day, this loan
accrues some interest. You pay this loan in EMIs because you cannot pay off all
the loan amount i.e. principal and interest at one go. So one way to limit the
interest that you will pay on education loan is to pay it off as early as
possible. But education loan also helps you save Tax under section 80E. We have
created an excel sheet that will help you decide when to pay off the education
loan.
If you cannot prepay the loan, follow these tips while paying EMI on
the education loans in India:
1) Start Early:
Don’t wait till your graduation,
to start planning on the repayment. Have a repayment model ready as soon as the
first phase of education (generally the first semester) is over. This will
enable you start saving early and gradually ease off the pressure of the
interest which piles up and by the time of moratorium period ends, you would
have already started with the repayment. If you have some savings already in
your account when you graduate, you could start paying the loan even before the
moratorium period begins. Do keep in mind that your loan is accruing interest
even during the moratorium period.
2) Set a comfortable EMI. Don’t be over ambitious:
Setting a lower EMI for a longer
duration might just be a better option than ambitiously trying to pay off the
loan early. Paying off the loan early is always the better option, but not by
compromising on other important needs like lifestyle expenses or training costs
for furthering professional skills.
3) Prefer a loan from Government Bank (or PSU Banks):
PSU banks typically offer loans
at lower rates than private banks. They are also more lenient when it comes to
prepayment of the loan. E.g. Andhra bank does not levy any charges for partial
or full repayment while HDFC banks charges penalty proportionate to the amount
of loan outstanding.
4) Speed up the repayment using the tax benefits:
Education loans provide you tax
benefits and the amount that you save can actually be used quite significantly
for paying off your debt faster. One way to do this is calculate the amount
that you save exclusively from taxes and deposit it biweekly along with the
ongoing EMI. This might seem insignificant in the short run but saves you
almost 3-4 months during the final payment which results into about 25-30%
lesser interest being paid.
5) This is the best of all
strategies. Even if you add ~100 extra every month for just 2 years consistently,
you can save up to ~20,000 in interest and you will end up finishing an 110
month loan in 106-107 months saving 4 months.
6) Pay off some part using bonus:
Every year, you will get bonus at
the end of the year. You can use this bonus to pay off part of your loan.
The key is to plan and stick to
the model that you have decided. Once you are earning in lakhs, a few thousands
in the long run won’t matter.
Calculate when to pay off your education loan
Once you take the Education Loan
Calculator India, you have to start planning how you would pay it off.
Should you wait for the entire loan tenure or pay it off before that? How much
money will you save and how much tax benefit will you forgo? And as such how
much tax would you save through this loan?
1) A1-11 are input cells. Enter the details of
the loan you have taken here.
2) Once you enter the data, you will see that
excel will calculate the formulae and fill the columns E to L with data.
3) Column G indicates the tax you would save
every month if you keep paying EMIs.
4) Column H indicates the total value of the
entire tax benefit you would forgo if you pay off the loan in corresponding
month. This is basically the current value of all the tax savings you would
have got in the future.
5) Column I is the prepayment penalty for paying
off the loan.
6) Column L is money saved by paying off the
loan early.
7) There
are two graphs that show money saved if you pay early. The first graph shows
two lines rad and blue. Actual money saved is the difference between these two
lines.
8) The graphs clearly show that
you would get maximum benefit by paying off the loan as early as possible. i.e.
the tax benefit forgone and prepayment penalty by paying off the loan does not
exceed the interest saved by paying off the loan.
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