Reema, 25, landed a great job after finishing her MBA at IIM Ahmedabad. She was able to procure an education loan easily because of the school's reputation. She also assumed that repaying it would be easy, since IIM grads usually clinch high-paying jobs.
Excited about her first paycheck, Reema eagerly opened it. But the initial exhilaration gave way to disappointment. - a big part of her pay check would have to go towards paying back her loan.
Realising the urgency to reduce her burden of debt, Reema decided it was high time to devise a plan to pay off her loan swiftly. Being well-versed in finance, she understood that reducing the principal amount would be key to lightening her financial load. Despite this crucial insight, she sought guidance from her trusted Chartered Accountant to craft a strategic approach tailored to her circumstances.
In today's landscape, obtaining an education loan is as simple as clicking a few buttons online. Banks and financial institutions readily provide education loans at appealing interest rates, whether for studies within India or abroad. However, the true challenge doesn’t lie in securing the loan, but in effectively repaying it.
To shed more light on this topic, we interviewed Chartered Accountant Abhay Asknani, who shared his valuable insights on how students like Reema can expedite their loan repayment process.
However, Abhay explains, ‘During this financial year, the interest rates on education loans have surged as a result of the RBI's decision to implement a rate hike cycle in response to inflationary pressures. This surge in policy rates have further caused a notable rise in the cost of funds for banks and other financial institutions, leading to an increase in their standard lending rates. Consequently, the final interest rates for various types of loans, including home loans, personal loans, car loans, and education loans, have significantly risen. In simpler terms, monthly installments have become more expensive across the board for term loans.’
So, what can students do?
While you may not have the option to defer your academic course, you certainly have the power to make smart choices when it comes to repaying borrowed funds within a shorter timeframe, perhaps even before their designated tenures expire.
What is the moratorium period?
A distinctive aspect of education loans is the moratorium period. During this period, you have the flexibility to postpone paying EMIs for up to 12 months after completing your studies, or 6 months after starting a job, whichever comes first. However, it's important to note that the length of the moratorium period can vary depending on the policies of the bank.
Abhay outlined steps to help you pay off your loans faster:
1. Start early: Begin repaying your education loan during the moratorium period to lower the principal balance, enabling you to clear the loan sooner than the agreed tenure. Make sure to thoroughly research loan interest rates and charges before committing. Utilise an EMI Calculator to determine the exact payment needed to fully clear the debt, considering even minor interest rate fluctuations that can significantly impact your repayment burden.
2. Budget your income: Follow the 50/30/20 rule to budget your income, allocating 50 per cent for necessities, 30 per cent for discretionary spending, and 20 per cent for debt and savings. Trim expenses on both necessities and luxuries to save more for loan repayment. Consider eliminating non-essential expenses like multiple streaming services or dining out frequently. Every saved penny should be directed towards loan repayment.
3. Refinance your loan: Investigate refinancing options with other lenders to secure lower interest rates, especially after graduating and entering the workforce. You may negotiate terms and conditions more effectively with a steady job and increased earning potential. Explore transferring your loan to a bank offering lower rates or renegotiating with your current bank for a reduced interest rate, leveraging reduced risk as a working professional.
4. Utilise 'found' money: Utilise unexpected cash windfalls such as gifts from relatives, signing bonuses, or tax refunds to make significant payments towards the principal amount, reducing interest payments over time.
5. Create additional income streams: Explore opportunities for supplementary income through side hustles or part-time jobs to make extra payments above the EMI, accelerating debt reduction. Leverage talents on social media or freelance platforms to generate additional income. Consider starting repayment during your course by securing a part-time job, dedicating earnings specifically to loan repayment.
6. Pay more than the minimum: Allocate funds beyond the minimum monthly payment to reduce the principal balance, thereby decreasing overall interest payments. Consider making partial or full prepayments if feasible, accelerating debt repayment.
Abhay emphasises that while repaying education loans may seem daunting, strategic organisation and budgeting tailored to your preferences and financial situation, can facilitate steady progress towards debt reduction each month.