Education Loan Repayment: Tips to Pay Student Loan Faster

You land a prestigious job after completing a degree abroad. The first paycheck arrives; with happiness, you tear it open, and then the other shoe drops. A chunk of it, not small but enormous, will go into education loan repayment. No one said paying off your education loan for abroad studies would be easy, but one thing we can say for sure is that erasing it sooner than planned is possible only by upgrading your repayment strategies. Understanding the importance of early loan repayment is crucial hence this comprehensive guide provides you with effective ways to repay your education loan early.

Important Things to Know Before Early Repayment of an Education Loan

If you plan early repayment of your education loan then it will save you a lot on interest, but there are a few things that you should consider to ensure that prepayment works in your favor. We have listed some of the important points that will help you analyze whether early repayment will benefit you or not.

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  Prepayment Penalties and Foreclosure Charges - Some lenders levy prepayment charges if you repay your loan early or may even impose foreclosure charges. You should check for any prepayment charges and other charges imposed on you in case of foreclosure of your loan. Public banks like SBI and BOB do not impose any prepayment charges. 

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  Tax Benefits Under Section 80 E - The interest that you pay on your education loans is eligible for a tax deduction under section 80E of the Income Tax Act. If you pay off the loan early, you will lose out on future tax deductions. Always weigh the tax benefits with the interest you will save if you prepay your loan. 

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  Impact on Your Credit Score - Your credit score plays a crucial role in determining your loan eligibility. Early repayment can boost your credit score by showing responsible repayment behavior.

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  Moratorium Period Interest - If you are in a moratorium period, interest accrues during this period. If you will consider repaying your education loan early, it will help reduce the compounding of the interest. 

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  Pay High-Interest Loans First - You should always focus on closing the loan with the highest interest rate if you have more than one loan. 

7 Effective Tips to Repay Education Loan Faster

Clearing your education loan is a challenging task. However, with the right strategy and a disciplined approach, it is entirely feasible to pay off your student debt ahead of schedule. Effective loan management not only alleviates financial stress but also paves the way for a more secure financial future. This involves understanding your loan terms, exploring repayment options, and possibly restructuring your debt. Below are some practical steps that can help you navigate the path to becoming debt-free more quickly and efficiently.

Enable Auto Payments:

If you choose automatic deduction of your EMI, it will save you from any potential penalty on missing an EMI payment. This feature ensures that your EMIs will deduct automatically from your bank account every month, eliminating the risk of negative impact on your credit score. If you are consistent in your repayment of your education loan, it will improve your creditworthiness. 

Choose a Shorter Repayment Period:

Choose a shorter repayment period while selecting your repayment terms. Shorter loan tenure means less time for interest to accumulate, resulting in lower overall interest payments. 

Suppose you secured an education loan of INR 20,00,000 lakhs at an interest rate of 10% with a loan tenure of 12 years, then your total interest payment will add to INR 20,44,136.

However, if you secured the loan with same terms but with a shorter repayment period, say, 7 years, then your total interest payment will be INR 12,77,069 lakhs. You will save a huge amount on interest payment just by choosing a shorter repayment period. To analyze your EMIs and to plan your repayment schedule, you can utilize our EMI calculator.

Tax Benifit Under Section 80E:

Under Section 80E of the Income Tax Act, you can claim deductions on the interest paid on your education loan. There’s no upper limit on the amount you can claim, and these benefits can be availed for up to 8 years or until you repay the loan, whichever comes first. The money you save through tax deductions can be used to make additional repayments, further reducing your loan burden.

Increase EMI Amount Gradually:

If you have capacity to direct more amount towards your education loan repayment or as your income increases, then consider increasing your EMIs then sticking to the same repayment plan. A higher EMI reduces the loan tenure and the total interest paid. Some banks even allow you to revise your EMI after a certain period without any additional formalities. 

Choose Full EMI During Moratorium:

Education loans comes with a moratorium period (which covers course duration plus 6 to 12 months) during which students are not required to make EMI payments towards their education loans. While EMIs are not mandatory during this time, but interest continues to accrue on your loan amount. If you will choose for full EMI during moratorium period instead of deferring payments, then you can reduce the total repayment amount significantly, helping you to close your loan faster.

Consider Re-Financing:

Find out if a loan transfer is possible to a bank that has cheaper interest rates. If you find another lender offering lower interest rates, consider refinancing of education loan or a balance transfer. This step can help you reduce your EMI burden. Once you secure employment, lenders might consider your profile for refinancing and reward your with a better interest rates. However, before switching, evaluate processing fees, transfer charges, and foreclosure penalties with your existing lender. Consider balance transfer only if the net savings justify the switch.

Apply for Scholarships to Reduce Your Loan Burden:

Securing a scholarship is a great way to lower your education costs significantly. Many universities, governments, and private groups offer scholarships for Indian students. These can help pay for your tuition fees, living expenses, or both. If you get a scholarship, you won’t need to take a big loan, which means you will have to pay less interest. This makes it easier and faster to pay off your education loan.

Explore various Study-abroad scholarships for Indian students.

Why Repay Your Education Loan Faster?

Repaying your education loan takes away a significant portion of your salary that can be utilized to reach other financial goals like saving for emergencies, etc. Delays in repayments of education loans can add a serious burden on the borrower.

If you will consider repayment of your education loan even one year early, it can save you a significant amount. Hence, borrowers must plan their education loans side by side and use effective budgeting strategies to stay updated with the repayment plans. The cost of studying abroad is substantial. While taking on a loan is a worthy investment in your future, it is not advisable to stretch the loan for a long duration.

Now you know how to clear education loan and the importance of paying off your education loan early. It not only alleviate financial stress, but also help in securing a healthier financial future. If you are looking for expert guidance on repayment or refinancing, connect with GyanDhan. Our expertise in comparing various lenders and their repayment plans ensures that you can make informed decisions tailored to yourspecific needs.

You can utilize our Future Earnings Potential tool to estimate your post-education income and plan your repayment accordingly.

Frequently Asked Questions