How to Foreclose Your Education Loan?

Education loans, also known as student loans, are the best financial resource that can help you pursue studies, whether in India or abroad. According to RBI, the outstanding portfolio under education loans grew by 17% to INR 96,847 crores in FY23, compared to INR 82,723 crores in the previous year? Predictions suggest that this figure will likely increase manifold in the coming years.

Gone are the days when taking a loan was considered a lifelong burden. Opting for an education loan, especially when studying abroad and requiring around 50 Lakh INR or more, is a wise decision. However, it does not end with taking the loan; repayment is crucial. This can be done as per the agreed schedule with the lender or by choosing to foreclose the loan before the scheduled time. Yes, it's possible, and in this blog, we will guide you through every aspect of foreclosure of education loan answering questions like “Can I repay education loan early?” and more.

Abroad Education Loan Overview

Before we start learning about the foreclosure of education loan, let’s have a quick look at some of the prominent lenders that can help you get an education loan abroad.

Interest rate as of December 2024

What is a Foreclosure of Education Loan?

Education loan foreclosure is the early repayment of the outstanding loan amount before the agreed-upon tenure. It involves making a lump-sum payment, settling both the principal and accrued interest. Borrowers opt for foreclosure to gain financial flexibility, save on interest, or due to personal circumstances. More benefits we will discuss later in this blog. However, it's crucial to understand the terms and potential penalties associated with foreclosure (if any), as these can vary among lending institutions. Reviewing the loan agreement and consulting with the lender is advisable before proceeding with foreclosure of education loan.

Pros and Cons of Foreclosure of Education Loan

Foreclosure of education loan has its benefits and drawbacks. These are the factors one should consider when deciding whether to foreclose their education loan or not. Below is a table that represents both aspects of education loan foreclosure.

*Example of saving interest payment - The education loan, totaling INR 23,00,000 with an interest rate of 10.55% for 10 years, carried a monthly EMI of INR 31,099. After 6 years, the outstanding balance was INR 12,13,518, with INR 11,52,680 paid in interest. Opting for foreclosure at this point would result in savings of INR 2,79,257, calculated as the difference between the total interest payable (INR 14,31,937) and interest paid till the 6th year. This underlines the potential financial benefits of choosing foreclosure of education loan.

Impact of Foreclosure of education loan on Credit Score

Foreclosing an education loan can have a positive impact on your credit score as it demonstrates financial responsibility and the ability to fulfill obligations. Successfully closing a loan reflects positively on your credit history, showcasing your capacity to manage debt. This positive influence is often more pronounced if the loan has been consistently paid on time, contributing to a favorable credit profile.
 

Foreclosing your education loan, especially if it has been long, may have a slight negative effect on your credit score. The length of your credit history contributes to your score, and shutting down an older loan account can slightly reduce the average age of your credit, impacting the a little. Your credit score considers the duration of active loan payments. 
 

Opting for foreclosure shortens this period, affecting your credit history. By paying off your loan in one go, you provide a smaller dataset for future lenders to evaluate your repayment behavior. However, when you weigh both these aspects, the positive impact outweighs the slight negatives and when this decision of foreclosure is taken strategically then the negative impact can be eliminated.

Tax Implications of Foreclosing an Education Loan

If you decide to foreclose your education loan, then it can have implications for tax deductions under Section 80E of the Income Tax Act 1961.

You can avail of the benefit of the interest paid on the education loan under section 80e. The deduction is available for up to a maximum of 8 years from the start of your repayment or until you paid your interest on the education loan in full, whichever comes first
 

Effect of Foreclosure: if you decide to foreclose your loan early then you lose the opportunity to claim the future deductions. If you prepay your loan, then there will be no interest to pay in the future and you can not claim tax deductions under section 80e anymore. However, you can still claim the interest paid in the foreclosure year. 
 

Considerations Before Foreclosing:

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  Cost-Benefit Analysis: if you have sufficient funds to repay your loan then you can first analyze whether savings from the tax from the deductions are greater than the interest saved by foreclosing your loan early. 
   

Financial Flexibility: Before foreclosing your loan, you must ensure that you have enough funds for your current finances as foreclosing your loan can strain your finances.

Watch the video now to learn everything about refinancing education loans, including benefits and processes

Eligibility Criteria for Foreclosure

If you are going for foreclosure, then banks often have certain conditions to allow you to foreclose your education loan. Below are some of the conditions that banks generally require you to comply.

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  Minimum Tenure Requirement: Many banks ask you to complete a certain number of EMIs before allowing you to foreclose your education loan. Such conditions allows banks to recover a part of the interest. 
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  Pre-Foreclosure Charges: Generally, most public banks do not charge or impose pre-closure charges for early payment. However, private banks might impose a penalty for prepaying your education loan.
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  Advance Notice: Some banks require you to inform the banks beforehand or to give them prior notice before foreclosing your education loan. Submit a formal request before they process your foreclosure.

Comparative Analysis of Foreclosure Charges Across Banks

Below is a comparative table showing the foreclosure charges for banks offering education loans for studying abroad,

Procedure for Education Loan Foreclosure

The process of foreclosure of an education loan is pretty simple. All you need to do is follow the below-mentioned steps - 

• Visit lender: Make a trip to your lender to initiate the education loan closure process. Connect with a representative who can guide you through the necessary steps.
• Check the loan balance amount: Verify the outstanding balance on your education loan. This information is crucial for making the decision about foreclosing.
• Fill up loan closure request form: Complete the designated loan closure request form provided by the lender. Ensure that all required details are accurately filled in to facilitate a smooth process.
• Wait for lender confirmation: After submitting the closure request, patiently await confirmation from the bank. The bank will review your application and provide the necessary approvals with a total outstanding amount calculation one last time.
• Pay outstanding balance: Clear the outstanding balance by making the payment through a cheque, ECS (Electronic Clearing Service), or any other method accepted by the lender. 
• Get the NOC (No Objection Certificate): Once the payment is confirmed, obtain an NOC from your bank also known as an education loan closure letter. This document signifies the successful closure of your education loan account. Keep it for your records as proof of loan closure.

Foreclosure of education loan is a decision that you should take after weighing several factors that have been shared in this blog. Now that you have knowledge about education loan foreclosure you will be able to make a wise decision based on your needs. The way we were able to make your foreclosure of education loan journey simple, we can also make your abroad education loan journey. We at GyanDhan can suggest the best lender after evaluating your particular needs and making the whole loan application process hassle-free. Additionally, we won’t charge a rupee from you. All you have to do is check your education loan eligibility with us. 

Read also:

• Education Loan Repayment Strategies
• How to get an Education Loan on a Low CIBIL Score?
• IDBI Disbursement Process
• Education Loan for Abroad Studies

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