Wave goodbye to education loan: 6 hacks for paying them off fast

Education loans are a great option for students going for higher studies. But EMIs (Equated Monthly Instalments) will hit your account six months-1 year after you complete the course. Early repayment can help students clear their debts sooner and plan their finances for the future. This will also have a positive impact on the student’s credit score as an education loan is often the first loan that she/he takes. Here is a guide on how you can repay education loans quicker.

Find scholarships to reduce the burden

Several universities and social groups provide scholarships to students. The amount awarded depends on several factors including income status, good academic record with high scores and the social background of the student. These scholarships can help in covering the tuition fee and hence can significantly reduce the principal amount. This, in turn, will reduce the repayment tenure and interest rates. So, look for appropriate scholarships before applying for an education loan.

Make repayment tenures shorter

The lender will usually ask the student about the repayment tenure when the student makes an application for an education loan. Students are provided with the option of a shorter tenure. Though the EMI will be higher than a long-term loan, a short-term loan will lower interest payments.

“A shorter tenure might see you pay higher EMIs, but it will also help you save a lot in interest paid towards your loan,” Bank of Baroda said in its note on managing education loans. For instance, the interest on a loan of ₹50 lakh with an interest rate of 11% per annum with a repayment tenure of 15 years works out to about ₹52.3 lakh. But the interest comes down to ₹32.65 lakh if the tenure is 10 years saving nearly ₹20 lakh in the process. However, the EMI on a 10-year loan is ₹68875 while it is only ₹56830 for a 15-year loan.

Start EMI payments during the moratorium

Education loans usually come with a moratorium period. This covers the duration of the study and extends up to six months-1 year after the course is completed. Most students opt for a full moratorium as it will be quite difficult to make payments before completing the course.

But if the co-applicant, who is usually the parent of the student, has the financial capacity to pay the loan, it is advisable to consider making full EMI payments during the moratorium period. Apart from interest savings, which would work out toRs 6.25 lakh- ₹7.5 lakh for a ₹50 lakh loan with a repayment tenure of 10 years, students will also be able to close the loans much earlier.

“While your payments do not start until the end of the moratorium, the interest on your education loan begins to accumulate from the moment you receive the funding. So, it would be wise to start making payments towards this interest while you are still studying,” Bank of Baroda said.

Take advantage of unique repayment benefits

Some lenders also provide incentives such as Income-Driven Repayment (IDR). The IDR enables the borrower to repay the loan based on her/his income level. Under this plan, the EMI amount is adjusted according to the borrower’s income. This ensures that repayments can happen faster if the borrower lands in a job that pays a great salary.

Make extra payments to reduce interest burden

Borrowers can also make anextra EMI payment against an education loan.“One should consider making extra payments annually to reduce the principal amount as it helps reduce the interest burden and shorten the overall loan tenure,” said Ankit Mehra, CEO, GyanDhan, an NBFC (Non-Banking Finance Company) that has a tie-up with edtech firms.

“If you were previously payingRs 15000 as your student loan EMI each month, try to increase it toRs 25000, and that will help you to pay the loan off faster. However, only apply this method if you are financially capable,” Tata Capital said in its explainer on ways to pay off education loans faster.

Avail tax benefits

Students can avail tax benefits under ‘Section 80E of the Income Tax (IT) Act’ on the interest paid on education loans. This benefit is also available to students who have taken an education loan for higher education. This will reduce the interest outgo enabling students to pay education loans faster.

There is no upper limit on the amount that can be claimed as tax deduction. But it is only applicable to the interest component of the EMI and not the principal amount. The deduction is available for a maximum period of eight years, starting from the year the repayment begins or until the interest is fully repaid, whichever is earlier.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.