The nitty-gritty of repayment of educational loans.
When you apply for an educational loan, the bank takes into account the tenure of course, fees, course material and other expenses. Accordingly, they come to an amount that should be sanctioned.
The course fees are directly disbursed to the college/institute. Every year, you are required to submit a form to the bank, which gives the details of the money required for this disbursal. Even though the institute may be abroad, the fees are paid in dollars or any other currency to the institute directly. For this transaction, the bank also charges a remittance fee.
There are two ways of repayment. If your parents wish to pay the loan, they can do so while you are completing the education. However, the other preferred option is that you repay the loan after completing the course.
In the latter format, the repayment of the principal portion of the loan begins after six months or a year of finishing the course, or when you get a job, whichever is earlier. The repayment is done on an EMI (equated monthly instalment) basis.
This is how the process works. For instance, you have taken a loan of Rs 5 lakh for seven years, with an interest rate of 13.25 per cent a year. After completing the course, you get a job that pays Rs 5 lakh a year. When you start repaying the loan, the EMI will be Rs 9,164. That is, annually you would be paying Rs 109,968.
In the first year of repayment, the interest component will be Rs 64,350, which can be deducted from the income while calculating tax. The result: A saving of Rs 21,872. So, the effective interest rate on the loan works out to around 10.75 per cent (instead of 13.25 per cent) for that particular year.
As mentioned before, some banks will also allow you a moratorium on payment of interest. This means that you can defer payments of the interest during this period. Hence, there is no need to pay anything to the bank at all till six months after the course is complete, or you get a job (whichever is earlier). If you opt for this option, then the interest is compounded quarterly and added to the principal sum for repayment. This option carries a higher rate of interest, but is a boon to those who cannot repay the loan during the course period.
Of course, the interest rate is lower, if you start repaying the loan immediately after finishing the course. Unlike other loans, education loans do not attract prepayment penalty. If you have the ability to prepay in the early years of your career, you can pay the entire outstanding loan amount without any penalty.
It is important to remember that there are a few constraints. If you have opted for a floating rate loan, you cannot switch to a fixed rate option mid-course. However, you can transfer your loan from one bank to another, if you find a more attractive offer. Normally, 1 per cent of the outstanding loan amount is charged to the borrower in the case of a loan transfer. You need to work out whether the amount you save by switching to a lower-cost loan is more than the switching cost.
Most importantly, if you are unable to complete the course, you will have to start paying the EMIs immediately. Some banks might give you a grace period, either to continue your studies or to start repaying the loan, but this is entirely at their discretion.
Source: www.apnaloan.com
