Have Gone Wrong with Your Education Loan? This is How You Can Correct it!
Last Updated : Aug. 10, 2020, 4:34 p.m.
An education loan is borrowed by students for pursuing studies in India and abroad. And because the loan repayment is dependent on the future income, the loan requires a co-borrower. Your parents can be a co-borrower in an education loan. But the problem is now not borrowing a loan, it’s the payment which creates problems for the borrower. In case you choose the loan at a higher interest rate, you might find it hard to pay the EMI if you don’t land up with a good job. So, in this case, what should you do? Don’t worry, in this article, you will know how to cope with an education loan payment when the situation gets out of your hand. Do read further.
Balance Transfer
Most of the financial advisors suggest the borrower opt for the balance transfer facility. Why? Because it is easy to carry on and can reduce your education loan interest outgo. How? You just have to find a lender that provides you a low interest rate on the balance education loan. And when you are satisfied with it, you can apply for the balance transfer.
How Does Balance Transfer work?
A balance transfer is a simple process in which the new lender first closes your loan account with the existing lender and charges a nominal fee for it. Once you decide to opt for an education loan transfer, your old lender gives you a loan statement of your balance amount. This statement is to be submitted to your new lender. When it receives this statement, the loan transfer begins to process. After the loan sanction, the new lender issues a cheque with which your pending dues with your former lender is paid. When the account is closed with your old lender, your new EMI starts from the next month onwards.
How Much Do You Save?
The savings amount depends on the interest rate of your education loan. If you are paying a high interest previously on our borrowed amount. And now the new lender reduces it, your loan repayment is impacted with it. Your EMI decreases, the interest outgo is reduced and the monthly budget comes on track. Refer to the example below to know how much you can save from the education loan balance transfer.
Example: Ramya borrowed an education loan to pursue a Master of Science in Health Informatics abroad. And after the course completion, she is capable of earning a handsome amount. When the moratorium period is over and the education loan repayment starts, she pays INR 36,005 every month towards her borrowed loan of INR 30 lakh which Ramya borrowed at an interest rate of 12.00% per annum for 15 years. After 5 years of EMI payment, Ramaya noticed that due to her education loan she isn’t able to save much. She decides to look for a lender that provides her the balance transfer facility. Fortunately, Ramaya found a lender that charged a low-interest rate of 9.10% on her loan balance. Check out the table below and know what amount she saved.
| Particulars | Details |
|---|---|
| Original Loan | INR 30,00,000 |
| Interest Rate | 12.00% |
| Tenure | 15 years |
| EMI @12% | INR 36,005 |
| Estimated Interest Outgo @12% | INR 34,80,908 |
| Interest Paid Till 5 Years | INR 16,69,874 |
| Outstanding Balance at the End of 5th Year | INR 25,09,570 |
| EMI Payable at the New Rate of 9.10% for the Remaining 10 Years | INR 31,926 |
| Interest Payable at the New Rate of 9.10% Over the Remaining 10 Years | INR 13,21,568 |
| Interest Paid Till Now + Interest Payable Over the Next 10 years | 16,69,874 + 13,21,568 = INR 29,91,442 |
| Estimated Savings in Terms of EMI | INR 4,079 |
| Estimated Savings in Terms of Interest Payment | 34,80,908 - 29,91,442 = INR 4,89,466 |
Prepayment
You can choose the prepayment option to pay off your education loan before maturity if you have planned for it. Yes, because it needs a lump sum of funds at one go to close the loan account. Why is prepayment used? It is used to close the loan early to save some money from the interest payment. When the borrower has been planning for the loan prepayment from the time of its sanction and saving money for it, he/she can do this easily compared to someone with no planning. The greater interest rate makes your loan burden more when you just started a job. And to cope with this situation education loan prepayment is the best tool for you. As per the RBI guidelines, any public or private sector bank can’t charge a prepayment fee for the education loan. Refer to the example below and know how prepayment will save you.
Example: Tanya borrowed an education loan of INR 25 lakh at an interest rate of 9.80% per annum. She chooses a repayment period of 10 years. During the course period, Tanya started a part-time job to save some money for an education loan. When the course is completed, she finds a permanent job in her desired sector and earns good money. After the moratorium period, the loan repayment starts and Tanya pays her EMI before the due date. Now, she wants to close the loan as there are fewer income savings and there are other needs as well. Tanya decides to do the education loan prepayment. Check out the table to know what amount she saves from it.
| Particulars | Details |
|---|---|
| Loan amount | INR 25,00,000 |
| Interest rate | 9.80% |
| Tenure | 10 years |
| EMI | INR 32,761 |
| Interest outgo over 10 years | INR 14,31,372 |
| Paid interest till 6 years | INR 11,55,451 |
| Balance loan amount | INR 12,96,627 |
| Savings amount | INR 2,75,921 (14,31,372 - 11,55,451) |