Education Loan repayment can become burdensome if it's not properly planned. Commencing your loan repayment before the schedule can prove to be very helpful in minimising the overall loan interest. It is a known fact that Education Loans are a saviour, especially for expensive, premier courses abroad. For example, Axis Bank Prime Abroad offers a collateral-free loan of up to ₹75 lakh with a tenure of 15 years.
Tips for Education Loan repayment
Some tips to effectively manage and repay your Education Loan while maintaining financial stability are:
Budget your repayment
Budgeting is an essential part of your Student Loan repayment. It will help you pay off your Education Loan very smoothly. Once you get a job after completing your course, start budgeting immediately, and do not indulge in reckless spending.
Keep aside a good portion of your monthly salary to pay the EMIs regularly. Spend only on necessities and not luxuries till you pay off a major portion or your entire Education Loan. Save whatever you can to build a lumpsum amount for repayment, reducing your loan principal and thus shortening the loan duration and lowering the interest.
Utilise tax benefits
A major benefit of taking an Education Loan is the income tax benefit associated with it. When you start repaying your Education loan, you can also claim tax benefits under Section 80E of the Income Tax Act. You can claim a tax deduction on the interest component of the loan repaid in a financial year for up to a maximum of 8 years or until your full interest is settled, whichever is earlier. There is no maximum limit on the amount, so you can claim the actual interest paid while filing tax returns.
Take your loan amount whenever required
Planning your loan amount disbursement is a very crucial step in managing your Student Loan repayment effectively. The interest is calculated on the loan amount disbursed in your account or your university's account, not on the sanctioned amount. You must ask your lender to disburse only the amount you require immediately.
For example, suppose your sanctioned loan amount is ₹25 lakh for your course duration of 3 years. Your first-semester fee is, say, ₹3 lakh, and other expenses like the hostel/mess/library/transport fee come to ₹1 lakh. So, the bank should disburse only ₹4 lakh so that your interest gets accrued only for this amount.
Use the features available
You should discuss various possibilities for lower interest rates or a flexible repayment option with your lender. Some banks offer a slight discount on the rate of interest for female/SC/ST/differently abled categories. One such attractive scheme is the Central Government Interest Subsidy Scheme. Under this, applicants from economically weaker sections can apply for an Education Loan of up to and inclusive of ₹7.5 lakh. The interest portion during the moratorium period, ranging from 6 months to 1 year, is borne by the Central Government.
Opt for fixed rates
You have the flexibility to choose either a floating rate or a fixed rate of interest on your Education Loan. Floating rates fluctuate periodically since they are based on the repo rate. Since the repo rate is reset every 3 months by the RBI, this can lead to an increase in your interest rate if the economic conditions are not favourable in the country.
To avoid the risk of rising interest rates, opt for a fixed rate of interest. If your Education Loan has already started and you have chosen a floating interest rate, then worry not! You can always switch it to a fixed rate by paying a one-time fee to the bank. This will certainly help you keep your Student Loan repayment stable and manageable.
Do you need to repay while studying?
Education Loans are associated with a term called the "moratorium period." It is nothing but the time duration between your course completion and the start of your EMI payment. You may not immediately land a job right after you graduate from your course. Hence, the banks offer a moratorium period of 6 months to 1 year, depending on the situation. However, this is not the same as a grace period where interest is not accrued.
The interest is calculated even during the moratorium period and adjusted to your EMIs later. But you need not pay during this period. You will start paying your EMIs after the moratorium period ends. Thus, you don't need to pay a dime during your course.
Also Read: Education Loan tax benefit: Exemption & eligibility under Section 80E
When to start repaying Education Loans?
Student Loans and their repayment can be a worrisome topic for many students. Since an Education Loan is generally long-term, you need to plan the repayment carefully to become debt-free as soon as possible. You must plan your finances to complete the loan in 7-8 years at least.
Although you have the option to start the loan repayment after a moratorium period of 6 months to 1 year, your interest accrues at a simple interest rate even during this time. Proactively starting the Education Loan repayment ahead of schedule can prove beneficial for managing your financial obligations more efficiently. By doing so, you can reduce the overall interest accrued on the loan and also ensure a more organised approach towards settling your educational loan, leading to financial stability in the long run.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
