Loan Basics: Pay off your study loan early

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Study Loan Abroad
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Loan Basics Pay off your study loan early
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Education loans are much sought after in India,
with increasing tuition fees and study expenses.
While colleges have increased the cost of study
on one side, companies that recruit students have
also started offering higher salaries. But
sometimes, you may be unlucky in your first job
and get one that pays very little. In some
companies, even full-time employees earn a
stipend for the initial phase (six months or one
year) in the place of a regular salary. So, how
should borrowers deal with education loans in the
case of those earning a stipend or have
inadequate income? Should they make use of the
moratorium period to postpone repayment of the
loan? Its imperative to first understand how
education loans work.
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How it works
Education loans work differently compared to
other loans. What is unique is the pattern of
interest calculation and repayment terms. The
repayment of the principal of the loan usually
commences after the completion of the education
course for which the loan is taken. In most
cases, repayment commences either one year after
completion of the course or six months after
getting a job, whichever is earlier. This time
period varies with lenders. Further, during the
moratorium period, banks usually charge (and you
pay) a simple interest on the amount borrowed.
Therefore, when your repayment starts, the
original amount of loan borrowed will be the
amount reckoned towards repayment.
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On the other hand, some banks do not charge an
interest during the moratorium period. But
accumulated interest during this period will be
added to the loan amount when the repayment
commences. Therefore, in such a case, the
borrower will be repaying more over the loan
tenure compared to the first option. It is
therefore always recommended to service a simple
interest on the loan during the moratorium
period. The uniqueness in terms of education
loans opens up different options to the borrower
while repaying. For someone who does not earn a
salary, but only a stipend, it may be tempting to
commence repayment only when a regular salary
starts kicking in.
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Planning repayment
However, as mentioned earlier, remember that the
more you delay repayment, the higher will be your
cash outflow. Try to commence repayment as soon
as you land a job. If the stipend is very high,
one can also explore the option of partly
prepaying the loan. In the case of summer
interns, it would be worth exploring the option
of part-payment of the principal during their
internship. For example, assume that a student
has borrowed ?10 lakh as education loan for a
two-year course at an interest rate of 14 per
cent per annum and tenure of five years after the
moratorium period.
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The bank disburses ?5 lakh in the first year and
another ?5 lakh in the second. Normally, the
student will pay ?2,10,000 as simple interest
during the course period of two years. Now lets
say luck smiles on him and he snaps up a summer
internship at the end of year one, with a stipend
of ?1 lakh a month for two months. He can then
choose to repay ?1 lakh of the loan. As a result,
the simple interest he pays during the moratorium
will be ?1,96,000 only, as he has already repaid
?1 lakh at the end of year one. Note that while
most banks do not charge a pre-payment penalty,
some do levy this or restrict prepayment for a
limited time period. Check the terms of the loan
first before borrowing.
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Recent trends show that the difference between
stipends and salaries has shrunk further, with
many companies offering a stipend that is 10-15
per cent higher than the previous years offers.
Further, many companies have also sought to
increase the number of summer interns they
recruit from top engineering colleges and
business schools across the country. A higher
stipend is a huge positive when you start
working, as you are left with a higher cash
flow. This surplus, if used to part pre-pay your
Study Loan Abroad , will not only reduce interest
outflow, but will also lead to a healthier
balance sheet when you start earning a
salary. Source http//www.thehindubusinessline.
com/portfolio/your-money/loan-basics-pay-off-your-
study-loan-early/article7364130.ece
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