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Balancing the books

Balancing the books

Manavjeet Singh |

Education is expensive, particularly if one is bent on getting into a premium institution or acquiring a foreign degree. With the fees of most professional courses starting at a minimum Rs.6 lakh and reaching a high of Rs.40 lakh, education loans provide an incredible ray of hope for students. In fact, for banks such loans fall into the priority category apart from housing loans. However, while such a loan might seem easy and hassle-free, paying back can be stressful and requires thorough planning.

No matter what one&’s debt situation, one needs to know how much is owed on the whole. Every loan might have a different interest rate and different repayment rules, and being aware the total amount that needs to be repaid helps in devising a plan to make ends meet.

Opting for a monthly installment that is low and can be paid off over a longer duration is a must. Although there is nothing smarter than paying off a loan as early as possible, there is no need to do so by compromising on other essential demands. Every loan has a different grace period and, let&’s face it, one cannot start repay the amount immediately after getting a job. A bank starts imposing interest from the time of loan disbursement by the end of each year or, perhaps, semester and this serves to increase the debt burden; so, if possible, some amount of interest should be paid off during the study period to lower the EMIs.

The number of defaults tends to rise with an increase in the loan period and default can ruin the credit score of not only the student concerned but also his/her parents, given that they are co-borrowers. If the monthly installments remain overdue for more than three months, the loan is categorised as a non-performing asset and this lands the borrower in the bank&’s bad books and sometimes collaterals are at risk as well.

While strategizing, one should focus on paying off loans with the highest interest rates. Making a budget on the total amount required on a monthly basis and assigning the excess amount to the debt with the biggest interest bite are essential. Once the amount has been cleared, repaying the debt with the second highest interest rate is necessary.

While considering payoff strategies, clearing the extra principal amount whenever possible is an absolute must. The faster one get this condensed, the less the interest rate becomes during the loan period.

If one fails to get a job even after the grace period of the loan amount, he/she can ask the bank to defer payments. Banks do extend loans based on the borrower&’s capability to repay and education loans, by and large, have tenures of five-seven years.

However, as per the guidelines, the tenure can be extended up to 10 years for loans of up to Rs.7.5 lakh and 15 years for loans above this amount. Sometimes it&’s hard to convince banks for a deferment, but if the case is genuine or exceptional, lenders do consider extending the repayment period.

Education offers no cheap alternatives, so it&’s best to avert any situation of debt pressure by ensuring you don’t stretch the limits when it comes to payback time.