Importance of education loan repayment strategy

According to the Bureau of Immigration (BoI), approximately ~0.13 million students travelled abroad for higher education as on March 20, 2022. This figure for 2021 stood at ~0.45 million and at ~0.26 million for 2020.

Furthermore, 40 million students were enrolled in higher education in India in FY2020. It is estimated that by FY2035, this number will touch the 92 million mark. The rising education inflation fails to deter students from achieving their academic aspirations as nowadays, students intend to finance their education independently without having to depend on their parents. Therefore, education loan is gaining massive popularity.

A student loan acts as an enabler to access quality higher education. An education loan is the first debt in a student’s life, and responsibly repaying it is essential to build a healthy credit score. Therefore, the repayment factor should be kept in mind right from the start of the education financing journey.

Students who take an education loan are entitled to a moratorium period, i.e., a repayment holiday during which they are exempt from paying any loan EMIs. This grace period refers to the time between the loan amount reaching students and when they make their first EMI payment. Depending on the lender, the moratorium period will vary.

It is important to understand that this is not an interest-free period. Interest calculation begins immediately after loan disbursal, and this interest accrued is then added to the principal amount due. Hence, several education-focused financing institutions recommend that the student fraternity plan their repayments well in advance as it proves to be beneficial in the longer run.

The first crucial step towards an effective repayment strategy starts during the academic journey planning process. A student’s academic success and employability potential have a huge impact on the repayment of an education loan. Hence, it’s advisable to undertake thorough research on the courses, universities, and job opportunities available.

Understanding the fine print of the loan structure is crucial for planning a seamless repayment strategy. Take the time to read all documents, terms and conditions and details regarding the loan structure. Students should discuss all the components, such as loan amount, tenure, repayment options, and EMI, with the lender to design the best repayment strategy.

• Maintain liquidity: Students must focus on prioritising their expenditures. This helps alter their spending habits and concentrate on saving to maintain liquidity. They must design a simple yet smart monthly budget and stick to it by spending judiciously. At the same time, they must set aside some amount every month as a backup so that they can pay their EMIs even during an emergency.

These are two basic tenets of any loan. Students must take the opportunity to understand various repayment tenure options and EMIs in order to opt for the most suitable one. An even simpler method is using an education loan EMI calculator, a smart online tool that helps the student arrive at an estimated EMI by simply entering the interest rate, tenure, and loan amount. This can aid in creating an education loan repayment strategy that best suits them.

As the moratorium period is not interest-free, aspirants should start repaying their loans in the form of simple/partial interest during the moratorium period. This also instils financially prudent habits among students.

Students may explore part-time jobs/internships to earn additional income. A student visa for most countries issued for full-time degree-level studies allows them to work for a maximum of 20 hours per week during term time. This can help young aspirants learn unique life skills, earn extra bucks to support their lifestyle, and set a small amount aside to pay their EMIs in the future.

Many individuals begin their credit journey by taking the first step with an education loan. Hence, systematic planning to repay an education loan helps build a healthy credit score and increase creditworthiness. In the long run, this allows individuals to avail better rates and features on other retail financial products in the future, such as car loans, home loans, and credit cards.

Financial literacy combined with responsible spending behaviour will make the credit journey for students seamless. Many financial institutions these days leverage automated services to send timely reminders to the students to ensure a smooth repayment journey for the young aspirants.