With the fees of most professional courses in India ranging anywhere between Rs 5 lakh and Rs 40 lakh, education loans are simply unavoidable today.
Meher Mehta (name changed) has just started her career with an MNC job. Even as she was preparing to give a treat to her friends from her first pay cheque, she was really worried about repaying her outstanding education loan. „Almost 70% of my earnings will go towards the EMI,” says Meher Mehta.
Meher and her friends (or many young working professionals like her, for that matter) get into the EMI bandwagon even before they start their professional career. With the fees of most professional courses in India ranging anywhere between Rs 5 lakh and Rs 40 lakh, education loans are simply unavoidable today.
On the other hand, students who have taken a loan to study abroad have little less to worry, thanks to the depreciating rupee that lowers the repayment amount. If they are earning in dollars, that is.
For others, proper, meticulous planning is the only solution. „As part of your repayment strategy, prepayment of the loan should be the top priority. But, at the same time, the student should get into a compulsory savings mode in any secured savings instrument so that s/he accumulates a corpus every year to settle the loan faster,” says Mukund Seshadri, certified financial planner & partner, MS Ventures Financial Planners.
Assuming the loan is for 7 years and interest rate is 12% p.a., the EMI on the education loan would be around Rs 17,650. „If the individual earns a take home salary of Rs 50,000, the balance Rs 32,350 can be used for buying a term cover and investments,” says Rishi Nathany, certified financial planner and managing director, Dalmia Securities.
„The premium for term insurance with a risk cover of RS 1 crore is likely to be Rs 17,000. After accounting for annual expenses of Rs 2,40,000 the balance amount of Rs 1,31,200 can be used to build a corpus,” he says.
„From the year I took a loan to date, the interest rate has gone up by 75 basis points, increasing my EMI burden,” says Prachi Shinde, (name changed), an MBA trainee. That is why her top priority is to clear the dues. Education loan rates from banks/institutions are currently in the region of 12-14% p.a.
However, the interest paid on an education loan is eligible for deduction u/s 80E of the Income Tax Act. „In case of pre-payment, this benefit would get reduced. Therefore, students will have to calculate the trade-off between the net effect of continuing to pay interest on education loan less the benefits received u/s 80E, vis-a-vis investing their money in other investments,” says Rishi Nathany.
This trade-off could determine whether or not to prepay the education loan. But if you are paying anything more than 50% of the take home salary towards the loan, you have to reduce the burden at the earliest possible opportunity. You can partly prepay the loan from your bonus or variable pay linked to your performance.
„I am thinking of using my sign-on bonus to part-prepay my loan,” says Meher Mehta. But you have to know the prepayment norms of the lender. „I am allowed to pre-pay lump sums higher than my EMI twice in one year without shelling out any pre-payment penalty,” says Meher Mehta.
These are not the best years for working professionals. Students are struggling to find „suitable” jobs and working professionals are facing the problem of shrinking salaries. Undoubtedly, for students, the initial job would to a great extent lay the foundation of a career. „However, having a job is better than not having one, especially when there is a loan to repay. If the student is good enough, s/he can always search for a suitable job later on,” says Mukund Seshadri.
Clear your education loan fast
You have to invest some money for lifestyle expenses and future goals. „Singles have the liberty to live on a shoestring budget. Once commitments and the size of the family increase, there is always the pressure to take a housing loan, car loan, retirement planning, etc. Hence make sure you save and invest at least 20% of your salary for future goals,” says Suresh Sadagopan, certified financial planner and founder, Ladder 7 Financial Advisories.
Also, you should build a corpus to partly prepay the loan, especially if you have taken a long-tenure loan, say for 5 or 7 years.
Every bank insists on a term cover/insurance in the name of the borrower. The risk cover should be equivalent to the loan amount, which will take care of the repayment if something happens to the borrower.
„However, you have to buy a separate term cover once you start earning. For one, term covers go to the website are really cheap, especially if you buy at a younger age. Second, it also offers protection to the dependent family members,” says Rishi Nathany. However, if you have no financial responsibility towards your family members, ensure that you buy a health cover, in addition to a personal accident policy, if possible. The health policy will prevent a drain on your finances if you have to undergo treatment for any ailment or accident.
The personal accident policy will ensure a more comprehensive protection portfolio, as it also compensates any loss of income in case of temporary disabilities arising out of accidents.