Education Loan Repayment: Studying abroad can be a life-changing decision for your future, but it is surely a daunting and difficult process too.
Those who desire to pursue higher education overseas or abroad but find it difficult to secure finance now have the option of paying for their education with the help of various education loans that are available in the market and are helping aspirants to study abroad.
Because no one wants to spend a substantial percentage of their monthly income on EMIs, paying off your education loan quickly and without breaking the bank is the ideal approach to finishing your education. However, managing the complexities of repayments and EMIs may hinder your best efforts, so we've put together a few tips to help you repay your education loan early without straining your finances.
Here, we will go over every factor of education loans for studying abroad. We will discuss other aspects of education loans along with why, when and how to repay education loans faster.
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Eligibility Criteria to Apply for Education Loan
The first and most important step is to determine whether you are eligible to apply for an education loan, before actually thinking about an early education loan repayment.
The general terms and conditions that are normally followed by any bank when obtaining an education loan are listed below. Please keep in mind that each bank may have its own eligibility rules that must be followed when applying to that specific bank.
The applicant must be an Indian citizen.
If the applicant is under the age of 18, his or her parents must take out the loan.
The applicant must have a strong academic record.
The applicant must have been accepted into a recognised overseas university/institution/college.
Because banks favour job-oriented courses, the applicant's intended course must be technical or professional.
Early Education Loan Repayment Planning
An early education loan repayment planning begins even before the loan is taken out. Anyone planning on repaying a student debt or finishing their degree is likely to face financial difficulties. Aside from fundamental financial planning, students must be aware of banking standards related to a student loan to reap timely benefits in terms of payback. All of the main education loan companies offer a variety of choices for students to manage their education loan repayment.
There are three primary considerations in education loan repayment:
Education Loan Repayment Calculations: comparing the amount of each EMI to the number of EMIs to be paid.
Education Loan Repayment Modes: how, when, and how much loan amount to repay.
Education Loan Management: ideas and tricks to make the most of the loan scheme's features.
Education Loan Repayment Calculations
Education loan EMI calculation is the most intriguing issue for any applicant, both before and after taking the loan, to return your education loan faster or earlier. To do such calculations, you must have accurate information on education loan interest rates and administrative fees.
You can also increase their EMI amount to pay less interest and repay your education loan sooner than intended. Alternatively, you can also prolong the study loan tenure (length) to suit the EMIs within your budgetary and financial constraints.
Education Loan Repayment Methods
Now that you know how many EMIs it will take to repay your college loan, it is critical to understand all of the payment options available to you to repay your education loan early.
Students are sometimes ignorant of their choices for making early payments. As a result, individuals are stuck in a protracted repayment period with exorbitant interest rates. Here is a complete list of all education loan repayment methods:
EMI is the most frequent way to keep your education loan repayment organized and self-driven (easy-monthly-instalment). EMIs are fixed sums decided at the time of loan application that students can pay every month to repay the study loan in instalments. The EMI is a figure that includes both the student loan interest and a portion of the loan principal.
EMI = (Annual interest on loan amount disbursed)/12 + principal loan amount component
Every month, the EMI component of the original loan amount is deducted from your borrowed amount, and this is how you return your entire education loan. The loan's interest rate component remains constant, therefore the greater the EMI, the bigger the component of the principal amount, and the faster you repay the education loan.
In addition to the EMIs, you can choose to pay a lump sum amount at regular intervals for your education loan repayment. This will allow you to repay your education loan early and decrease your total interest burden.
Some banks only allow partial payments based on a processing fee and up to a specified monetary restriction. They also charge a processing fee in some circumstances, albeit not all banks do. Part-payment should only be used to repay an education loan if the total amount is at least four times the monthly EMI (based on trends, not statistically validated)
Note: The sooner you pay off your education loan, the less expensive it will be for you. Every early instalment paid reduces the pending principal amount, which means the bank may only charge less interest on the next instalment.
Pre-Payment or Foreclosure
Applicants who can repay the entire loan amount in one lump sum might choose between education loan pre-payment and foreclosure. After the most recent revisions in banking regulations, almost all banks are required to provide this service, however, some still charge a processing fee. Still, an education loan repayment in a full settlement is preferable to repaying it gradually.
Repaying an education loan all at once eliminates all interest that would otherwise be paid monthly, increasing the total cost of the loan. While pre-paying your education loan in one lump sum will entail just minor administrative fees, it will save you money on interest rates.
A loan that is extended for years results in more EMIs; more EMIs result in more interest paid, and more interest results in a more expensive loan. For example, an education loan of INR 1000 pre-paid at 2% processing fees is far better than INR 1000 with a total interest of INR 500 spread out over 5 years.
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Education Loan Repayment Modes
Applicants can repay their education loan in a number of ways, and every bank accepts all types of payments. Some loans, such as education loans for study abroad, demand specified payment methods. A better understanding of education loan repayment options makes it easier for applicants. Here is a complete list of education loan repayment options.
Education Loan Repayment by Cheque/DD
Almost all banks accept cheques for education loan repayment. Many institutions even allow PDCs to be assigned (post-dated-cheques). These post-dated cheques are pre-signed cheques for a certain EMI amount that are submitted to the bank and utilised only when the EMI is due.
Some banks also offer cheque collection services for a small fee, which aids in student loan servicing on-site. Demand draft, on the other hand, is a different story. Because demand drafts are relatively risky, not all foreign banks enable education loan repayment by them.
Education Loan Repayment by Cash
Almost all national and foreign banks accept cash for student loan EMIs. Applicants and co-applicants for a student loan can pay their EMIs in cash by visiting a bank or using a home collection service. There are no additional costs for cash repayment at the branch. Cash collection, on the other hand, is subject to a regular service fee.
Education Loan Repayment by Automated EMI payments (ECS/NACH)
The mode of automated loan EMI repayment is ECS (Electronic Clearance Services) or NACH (National Automated Clearing House). Applicants who want to repay an education loan from a savings account at the same or a different bank can use this service. They would need to check and sign a NACH mandate, which authorises the loan provider (bank) to request and receive automated payments from the savings account on the due date of each month. You can cancel the service at any moment, and you can halt the payment of any specific EMI if there is an insufficient balance. Default in automated EMI payments is subject to penalty penalties.
Why Should You Repay Education Loan Early?
A loan payment or an education loan repayment deducts a considerable percentage of your monthly paycheck that could be used to attain your financial objectives. It prevents you from changing jobs because it will be difficult to handle the payment. Delays in education loan repayments place a significant burden on the borrower, especially when your credit history is developing.
If you borrow INR 20 lakh for 15 years at an interest rate of 9.45% per year (for example), the interest amount you will have to pay will be INR 17,48,355. And if you choose a 10-year term, your total interest payment will be INR 10,98,975. As you can see, paying off the debt early can save you up to INR 6,49,380.
How to Repay Education Loan Faster?
Paying off the education loan ahead of schedule will necessitate preparation and execution. Let's have a look at the approaches you should take to kickstart a faster education loan repayment:
Emphasise on Planning
Make a repayment plan for your student loans that span 4-5 years. Consider each EMI payment to be an unloading exercise; the more you pay, the less burden you carry. Set goals for your finances to satisfy the study loan payment schedule. Foreign education seekers typically prepare their money for 1-3 years before applying for study abroad exams.
Pay Extra Money with Every Installment
Add a little more money to each instalment of your education loan repayment. Doing so regularly will help you save money on interest over the life of your student loan. If you follow this technique, you could save a lot of money on interest in the long term. Education loan repayment is all about how quickly you pay off the principal.
Get a Part-Time Job While Studying Abroad
You may try paying down the basic interest while studying to reduce the overall amount owed (i.e. during the moratorium period). Even before you start making EMI payments, this will help reduce your overall debt burden. Furthermore, many banks provide interest reductions of up to 1% if you begin payments within the moratorium period. You can pay off the simple interest in a lump-sum payment after each course year, or you can try to pay it off monthly, depending on your financial situation at the time.
While attending university or college, it is advisable to work part-time to accommodate your schedule. Saving money from a part-time job will go a long way toward making the loan payback process go more smoothly. This strategy is very useful for students studying abroad.
There are more and more options to earn stipends and minor salaries while studying. As more organisations and brands open their doors, new internship options emerge, in addition to the current part-time job opportunities available to students, such as being a teacher's assistant. Furthermore, students are given numerous incentives such as discounts, meal plans, scholarships, and more that can help them save and budget significantly, especially while studying abroad.
Be Financially Disciplined When You Start Earning
Setting aside a certain amount each month by carefully balancing your budget is critical to keeping your EMIs in check and having enough money to get by for the month. It may entail living the student lifestyle for a little longer than you expected (or want), but cutting back on spending and putting every additional rupee towards your loan will pay off in the long run.
Each month, create a budget by estimating your essential expenses: rent, bills, EMIs, and basic living expenses. Make sure you have enough money each month to fulfil these necessities.
Automate Your Payments
Enabling an automatic payment system is another method of enforcing not only repayments of education loans on time but also savings. Automated payments always eliminate the possibility of EMI delinquency and penalties. To keep expenses under control, applicants can pre-determine the extra EMI amount and the interval for automated payments. This method may also result in a lower interest rate from the education loan provider. It could have a significant impact on the total interest paid on the education loan repayment.
Pay Variable Rate Loans First
If you have more than education loans to pay off, some with variable interest rates and others with fixed interest rates, you should prioritise the variable rate loans. Even though the present variable rate is lower than the fixed rate, it is vulnerable to change. A sudden increase in interest rates as a result of economic shifts may take you off guard.
Claim Tax Deductions
Section 80E of the Income Tax Act allows for tax deductions for education loan repayments. While the amount you claim is based on the total interest paid on your loan in a year, there is no upper limit to the amount you can deduct. Furthermore, these deductions can be claimed by anyone paying the loan, including the student's parent, guardian, or spouse.
While this provides savings by providing tax deductions to the very people who take out an education loan, keep in mind that the deductions may only be claimed by the loan applicant who is repaying the education loan.
Insurance Set-Off Education Loan Repayment
Banks require term cover/insurance in the borrower's name as part of their policy. The risk cover should be equal to the loan amount, and it should cover repayment in the event of a natural or unnatural termination.
When to Start Repaying Education Loan?
Although all study abroad education loans have a moratorium period, it is best to begin repaying the loan as soon as possible. This moratorium period is not without interest. Having said that, the interest rate on education loans can be high. If you do not begin repaying the principal amount, interest continues to accrue. Even during the moratorium period, interest must be paid.
This means that if you do not reduce the outstanding loan amount, you wind up raising the interest load and thus the overall loan cost. Aside from that, if you begin with your education loan repayment early, you can improve your credit score.
Remember to consider all outcomes and opportunities when arranging your student loan payback to make it simpler both financially and mentally. If you haven't received a credit sanction yet and are still planning or evaluating the possibility of repayment, it may be beneficial to invest to grow your existing corpus of savings to reduce the amount of credit you require, which may, in turn, reduce your tenure or interest rate on your education loan.
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