Should you prepay your education loan?

Education loan

A wide variety of education loans have given wings to the dreams of students with aspirations for higher study. An education loan is the most cost-effective means to fund education. A wide spectrum of committed services and products of banks and NBFCs have enabled several deserving students across the nation to fulfil their dreams of higher education.

Currently, education loans are easily available with the base criteria being an individual’s past academic performance, course and college opted, entrance exam score, co-applicants, CIBIL score, etc.

Here are a few important aspects the students applying for student loans need to be aware of.

Taking charge of your finances

Disciplined financial planning is the only solution. Prepayment of loan should be the top priority as this reduces the tenure of the complete loan. However, at the same time, the student should focus on savings through other secured savings instruments to accumulate a corpus of funds every year to repay the loan.

Interest amount repayment

It is always better to start early. Education loans can be availed with or without a collateral depending on case to case. The rate of interest is lower when the education loan is availed against collateral, which eventually reduces the EMI amount.

Students can begin paying the interest amount while pursuing their education by working part-time or with flexible work opportunities that are available across the world. At this time, the interest charged is simple interest, which eventually lowers the repayment amount. From thereafter, the EMI will be deducted towards the principal amount repayment.

Prepaying your education loan

Generally, the repayment period for an education loan is 10 years, but students may prepay the loan earlier as per their earnings.

Education loan rates from banks or financial institutions are currently in the region of 12-14% annually depending upon whether it is a secured or unsecured. However, if the student is paying anything more than 50% of his/her salary towards repaying the loan, it is imperative to reduce the burden at the earliest to start accumulating sufficient funds towards savings. Another option can be to partly prepay the loan from a bonus, any personal savings or any other variable pay such as incentives linked to professional performance.

Also, begin investing for the future at an early stage, loan repayment should not be the only priority.

Students and young professionals must consider investing funds for future goals. Single young professionals have the liberty to live on a low maintenance budget, which can change once commitments increase to fulfil other needs such as home loans, car loans and maintaining other liabilities. Hence, they must develop a habit to save and invest a part of their salary in other instruments from an early stage to achieve future goals.