What is Education Loan?
An education loan is an amount that students borrow from a bank or a financial institution to meet the financial requirements of pursuing higher education in India or overseas.
Parents usually do the running around to get the best education loan deal; however, student is usually the main applicant of the loan, with a parent, sibling or spouse being the co-applicant. To be eligible to apply for the loan, you should be an Indian citizen and should have gained admission to a college or university in India or outside the country.
Before availing of the loan, always compare different available loan options, your requirement, education loan interest rates and the lenders. Once the shopping is over, the next important concern is to repay the education loan as quickly as possible.
When do you Start Repaying Education Loan?
You do not start repaying your education loan immediately after your education is complete. Banking institutions provide a moratorium period from the completion of your studies and you do not need to pay any EMI during this phase. This period is 6 months from landing a job or 12 months from the completion of the course, whichever is earlier. However, this varies for different lenders. But the tricky part is that the interest is valid even during the moratorium period and that is added to your repayment amount.
Therefore, the earlier you start your repayment, the better it is because you will be saving on the interest. Also, earlier repayment would aid in earning a good credit score. Any default in EMI payment could negatively affect your credit score, jeopardising your chance of getting a lower interest rate on bigger loans later like a home loan. Thus, be careful at every step to stay financially healthy in the long run.
This caution should be maintained even when pursuing higher education. College students should avoid falling into the credit card and personal loan debt traps, as this can instill unhealthy financial habits. Instead, they can opt for financial products especially created for them by nucash.money.
College students can get their first-hand experience with banking by opening a savings account at neo bank NuCash. By opening an NuCash student account online, students can save time and understand simple and friendly banking. The neo bank also offers instant personal loans for students to fulfil various needs, including lifestyle needs, for a reasonable fee with no hidden costs.
Tips to Repay Education Loan Fast
It makes sense to strategically manage your finances to get rid of the education debt as fast as possible. You need to make smart choices and be aware of financial policies affecting your loan. Let’s look at some tips to repay the education loan.
1. Make Extra Payments, if Possible
Every month, you pay a fixed amount towards your education loan repayment. The amount is called equated monthly intalment (EMI) that includes both the principal money (money borrowed) and the interest. The lenders provide a provision whereby you can pay more than the fixed EMIs. So, if your meticulous financial planning allows you to pay more than the fixed EMI amount, you should go ahead with it, as it would significantly bring down your loan duration or the loan tenure and the loan amount. This would eventually aid in easing the debt burden quickly.
When you start earning, you might not be shouldering many responsibilities, making it easier to put aside some extra money for the education loan repayment. However, these extra payments should not come from your savings account or other savings products. Another point to be careful about is the prepayment fees that many lenders levy on the extra payment. Always inquire about this aspect before taking any step, else you might end up paying more.
2. Refinance, if Getting Better Deals
Refinancing is another way of quickly paying off your education loan. Refinancing is getting a new loan from the current or a different lender for a better financial deal in terms of lower interest rate. This helps in reducing the EMI paid each month. It is important to compare various products and weigh up the pros and cons associated with refinancing of the education loan. This exercise will surely ease the burden of education loan repayment.
3. Stick to a Budget
When you embark on your earning journey, wanting to splurge can be a natural temptation. Though once in a while splurging is fine, it is best to stick to your monthly budget and be financially disciplined. This good habit would help in quick repayment of the education loan, allowing you to channelise your finance towards other investment products.
Get to understand your different expenditure heads and create a budget each month to spend wisely. This method can also help in reining in your spending habits so that you can utilise the money for various savings instruments or direct it towards additional payment for the education loan. Try to stick to the budget to be able to control your money and meet your financial goals.
4. Make Advance Payment
Financial institutions offer the scope of making advance payment or prepayment towards the education loan to get over with it quickly if you wish to do so. And if the EMI of your loan eats up a big chunk of your monthly salary, you should definitely consider making advance payment to end your entire loan early. Ending the loan fast would leave you with enough money in your hand to focus on other wealth-creating instruments. Longer loan tenure means more interest.
However, one advantage of the education loan is that you enjoy tax deductions under Section 80E of the Income Tax Act on the interest payment of your education loan for 8 years from the year you start the repayment. And there is no baggage of upper limit. However, do your math well before deciding to continue paying the EMI for 8 years or wrapping up the loan early. If you save some extra amount by paying off early, you should surely take that route, as that would help in meeting your long-term financial goals.
Also Read: Neobanks for students: The benefits
Q. What is interest rate?
Interest rate is the amount or fee you pay for borrowing money from a bank or a financial institution. It is the percentage of the principal or the total loan amount.
Q. What happens if I am not able to repay my education loan?
When you are not able to repay the education loan, your credit score becomes low. This would prevent you from taking any other loan in future. In case your loan is collateral based, the lender might seize or auction the property to recover the loan cost.
Q. What is the eligibility criteria for an education loan?
The eligibility criteria for an education loan in India are:
- An Indian between 16 and 35 years (min age can be 18 yrs for some banks)
- Admission in a recognised university (in India or overseas)
- Parents or guardians should have a source of income
- Need of a collateral or a guarantor depends on the loan amount
Q. What is a credit score?
A credit score is a three-digit number ranging from 300 to 900 that shows your creditworthiness or your capability to pay back a loan. It shows your financial history and is an important eligibility criteria to get a loan. Higher credit score means you have borrowed and repaid responsibly.
Q. What is interest?
Interest is the amount that you pay to the lender for borrowing an amount from them.
Q. Can I claim tax deductions if my father is the main applicant of my education loan but I am paying the EMI from my account?
In this scenario, neither of you will get the tax benefit. You cannot claim the tax benefit because you are not the main applicant of the loan. Your father can claim the benefit only if he pays the EMI from his income chargeable to tax.
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