According to Google AdWords Keyword tool, over one lakh people search for the term “education loans” every month in our country. At the same time, the applications for education loans have also increased drastically over the last eight years. In response to this growth, the government has mandated that every student who is eligible for a loan should not be denied an educational loan. Although this amendment has led to easy processing of educational loan, the paying back of loan requires strategies that should be well thought out. Unlike other categories, repayment of education loan does not start immediately. The students get a “moratorium period” or a repayment holiday for a particular duration of time, that is, one year after the completion of studies or six months after they get a job, or whichever is earlier. Students can use this extra time to build a corpus that can be used for partial pre-payment at a later stage.
Although, EMIs start only after the moratorium period, the bank starts levying interest from the day it disburses the loan. The amount keeps adding up increasing the debt burden. Repaying the interest will help lower EMIs. Many banks also provide certain percentage of interest concession to those who repay the interest debited during the moratorium period. This installment process also helps students to reduce the interest that they have to pay.
Be Prepared for Rate Fluctuations
Once the students obtain jobs and start earning, they must make provisions that will act as a buffer for future rate hikes as Education loans normally have floating rates of interest. The interest is typically the base rate plus a fixed spread of around one to two percent. Maintaining a surplus worth of three installments will be a handy planning to ensure that the EMI payments remain uninterrupted. Considering the shaky economic conditions and present job market, it might look difficult to carry forward. However, it remains to be one of the most practical solutions ahead for the students.
Loans are always a burden for any individual, as they have to keep aside certain amount of their salary to repay the loans. Every coin has two sides and education loans will not become a heavy burden for borrowers any longer as the Section 80E of Income Tax Act helps borrowers with a definite amount of tax deduction if they are individual taxpayers. To benefit from this tax relaxation, the education loan should be taken in the student’s name. Thus, taking loan in the student’s name will be a clever move rather than taking loan in parent’s name. It will benefit the long term economic stability of the family. Proper planning and research will prepare the applicant for a steady walk over the education loans as loans are feared for invisible pitfall, that can ruin one’s life.