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Paying off Education Loan in India



When you speak of education a famous saying comes to mind " Education is the most powerful weapon which you can use to change the World ". If you are educated you are the master of your own destiny. A good college education is priceless, and if you need to avail an education loan to have one, then you must do so.

You have availed an education loan to get a good college education. You now have a great responsibility on your shoulders. You not only have to pay back the education loan, but also pay it back in time. You will generally have to repay the EMI’s on your education loan 6 months or 12 months after you complete your educational course or after getting a job whichever is earlier. This is known as the moratorium period.

When should you start repaying your education loan?

You avail an education loan from a reputed bank. Your bank starts charging (levying) you interest on your education loan from the time of disbursement of the loan. This might be at the end of each course year or semester. You do not have to start making your EMI repayments (Repayments on your education loan) until the end of the moratorium period.

EMI = Principal component + Interest component

But since the interest on your education loan is levied from the time the loan is disbursed it keeps adding up and is a sizeable (quite a big amount) after the moratorium period. If you pay simple interest on your education loan (or if you cannot your parents could do so) the EMI’s on your education loan will be much lesser at the time of repayment. You don’t have to make any repayments on your education loan until the end of the moratorium period but it would be wise to do so.

Avail an education loan only as per your requirements

Avail only that amount of an education loan that you really need to complete a good quality education. If you do not need a laptop to complete your professional course why add the extra cost to your education loan?

When you are a student pursuing your educational/professional course you might be casual while buying that laptop (which you might not need) and adding the cost to your education loan (Availing a higher education loan than you need). But you can be sure the burden of repayment of those education loan EMI’s will not be painless.

Should you prepay your education loan?

Many banks charge you a prepayment penalty if you prepay your education loan .It would still be wise to prepay your education loan if you can afford to do so as it will save you on EMI interest repayments at a later date.

You could lose on the tax benefits if you prepay your education loan as well as you might have to pay a prepayment penalty, But if you prepay your education loan and save a large amount on the interest repayments, then it would be better to forgo the tax benefits.

What happens if you are not able to prepay your education loan?

You get tax benefits if you avail an education loan. You can deduct the interest you repay on your education loan up to any amount (without any limit) from your taxable salary under Section 80 E of the income tax act. You get this deduction under Section 80 E from the year you start repaying the interest on your education loan and for 7 succeeding years after that or until you repay the interest on your education loan in full whichever is earlier. No tax deduction is allowed on the principal amount of the education loan. You can save tax in the initial years of your career by using the tax benefits on the education loan you have availed for your college education.

What happens if you do not repay your education loan?

Banks simply hate to lend blindfolded. They like to have their facts right. Banks want to know as much as possible about you before they sanction you a loan. You avail an education loan from your bank and the bank creates a credit information report (a detailed report on your past loan repayments if there are any).Your credit information report is then sent to Cibil which then assigns a score between 300-900. If you default on your education loan or fall behind on your repayments Cibil assigns you a bad credit score (say<600 )

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