How to manage education loan repayment

Education is undoubtedly a very important part of life. More so, higher education, as it decides the future course of your life. 

With the help of educational loans, it is possible for anyone to study the course of choice at any place, India or abroad. However, educational loan comes with its own conditions and it is after all a loan, it has to be repaid.

Nisha completed her Masters degree at a University in the UK and managed to secure a job paying her Rs 40,000 (when converted in INR). For this course, she had availed a loan of Rs 10,00,000 from a nationalised bank.  

The EMI after the moratorium period came up to Rs 29,396, leaving her with very little money to manage her day-to-day expenses and make some investments for future. What should one do to avoid such situations? 

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Nisha is in a better position, she could at least secure a job and is managing to service her loan; many students fail to secure jobs that can even pay their EMIs. So how do you balance education loan repayments in the early years of your career?

Evaluate before you apply for a loan: The balancing act does not start after finishing your course; it starts much before. When you think of applying for a loan, do a thorough check on all aspects of the course you intend to study, its suitability in the current economic scenario, employability prospects, both in your country and abroad, forecast for that particular sector in the near future and long term. Some fields that involve research etc. may take a longer term.

Apply for an optimal loan amount: You may prove eligible for a big loan amount. If you meet all conditions, you may be eligible for the entire course fee amount as loan. 

However, do not be tempted, and take only that amount which you require. You may think of part funding by dipping in to some funds from your family, or think of a part time job while studying.

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Your relation with the bank/financial institution: Scout around for best interest rates. If you/your parents have been banking with a particular bank for long, you may be eligible for lower interest rates or softer repayment terms.

You could also consider availing loan from agencies that offer step up repayment facilities, which means lower EMIs in the initial period and as you move higher up in your career, the EMI increases.

Also recently, the maximum tenure for repayment has been increased from 10 years for loans up to Rs.7.5 lakh and 15 years for loans above Rs7.5 lakh.

These are some of the points for attention before availing the loan. However, how do you manage your repayments after finishing the course? Read on…

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If you are one among those who manage to secure a good job with a good pay that allows you to service your EMI as well manage your expenses with ease, you have nothing to worry about.

Unfortunately not all manage to do so, and need some help managing repayments. It is estimated by Assocham that only 10% of the students graduating from Indian business schools secure a job immediately after completion of studies. This is barring the top 20 schools of course!

What if you are unable to repay on schedule: Banks generally wait for a month or two. 

Even then if the payments are not forthcoming, a notice is issued and   a penal interest is also levied on the overdue payments. Even after this if repayment does not happen, the collateral offered is taken into possession of the bank. 

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However, do not let the situation go so far. If you feel, you are unable to service the loan, contact the lending agency and apprise them of the circumstances.

Depending upon your credit profile, the lenders very often work out a feasible solution by either extending the moratorium period or cutting the EMI amount and extending the loan term.

How do you avoid such a situation?  Generally when economic and job conditions are not very favourable, do not wait for that dream job. You might have to accept jobs that are lower than your expectations. Do not worry, when times change, your experience in this job would land you a better job. No job is better than some job, when you have a loan to clear.

Keep a check on expenses, do invest: When you have a new job, it is tempting to go splurge. But always remember your loan repayment comes first. It is better to set an auto debit facility for your EMI, so that you don’t miss an EMI. 

At the same time, ensure that you also start investments in the right way. Buy a term insurance, personal accident policy and invest in for some highly rated mutual fund investments or PPF.

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Try prepayments: Save up some money to prepay a certain portion of your loan every year or at least every alternate year. Check on the prepayment clause, most of the agencies do not charge on prepayment of loan. This is important, especially when you have very long loan tenure.

Avoid missing repayments: It doesn’t matter how big the loan amount is, repayment on time is what matters. Loan below Rs 4,00,000 come without offering collateral, but this doesn’t give you the liberty to default. Remember your credit status is at stake, you would like to have a low credit score at the beginning of your career.

Managing loan repayments is not a daunting task; it just calls for some bit of planning to set you on the right track.