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Should you opt for a student loan? Ways to reduce student loan burden.

Image Source – iStock, Vector illustration

Graduation years are assumed to be arguably the best years of life. But the narrative can be different if graduation or post-graduation years leave you in debt of lakhs in student loans. Yet, it won’t stop anyone student from pursuing higher studies because education is expected to be the only way to get a better standard of living and make money.

If a student does not want to take high risks at a young age there are only a few alternatives to it. They could either apply for scholarships. Working while studying and gaining experience to enhance their resume. Likely, those with a college degree will have a plethora of job opportunities and higher earning potential. According to 2021 U.S. Bureau of Labour Statistics data, adults ages 25 and older with a high school diploma but no college experience earned on average $809 per week, while those with a bachelor’s degree earned on average $1,334 per week (earnings listed are for full-time wage and salary workers). This works out to a $27,300 difference in annual salaries, which is a considerable amount.

If you’re a student who does not want to be burdened with millions of student loan debt, here’s what you can do to manage it.

  1. Go for a collateral Loan

Most banks allow students to take education loans without collateral. However, you must know that opting for a secured loan with collateral can be a cheaper option. A student can opt for a loan amount of 7 lakh rupees without any collateral security. Many banks or financial institutions do not ask for collateral unless the education loan amount is higher than 7 lakh rupees. An education loan with collateral offers a lower interest rate compared to unsecured loans as the lender is not exposed to a high risk of default by the borrower. So, if you own any assets like land, property or FD, you can use them as collateral to avail of an education loan from the same bank where you have these assets.

  1. Pay interest during the moratorium

Equated monthly instalments (EMIs) of education loans do not start immediately after the loan is disbursed. The borrowers can start the loan repayment after the completion of the course or when they start earning. This grace period for borrowers is called a moratorium. Though the borrowers do not necessarily have to pay the EMIs during the moratorium period, simple interest is still charged by the lender which is added to the principal amount.

Some banks may offer concessions (usually 1 per cent) on the overall interest rate if the borrowers choose to pay the interest amount during the moratorium period. Thus, it is advisable to pay the interest portion of the loan during the moratorium period to reduce the cost of repayment.

 

  1. Loan subsidy schemes

The central government and various state governments as well offer subsidy schemes to make education loans more affordable.

 

  1. Form a sensible repayment strategy

Normally, unsecured education loans are available for a period of up to five to eight years. On the other hand, secured education loans are available for a tenure of up to 10 to 15 years.

Secured education loans are available for longer tenure – up to 10 years for loans up to Rs 7.5 lakh, and 15 years for a loan amount above Rs 7.5 lakh. Though longer tenure reduces the monthly EMI amount, it increases the overall repayment cost. Hence students should prefer to go for a shorter repayment tenure. Also, repayment of an education loan does not carry any penalty, so students can repay the outstanding loan amount to save on interest costs.

 

  1. Lenders may offer concessional rates for women, those studying in premier institutions

Banks and lenders also reserve their lowest rates for students going to premier institutions such as IITs and IIMs, or universities of national importance. The eligibility varies from one lender to another.

 

Point to note

If you apply for an education loan, then you are eligible for tax deduction under Section 80(E) of the Income-tax Act, 1961. The deduction can be claimed on the interest paid towards the education loan. However, you must know that the tax benefit can only be claimed by an individual who has taken the loan even if he/she is not the actual beneficiary.

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