Why is Financial Planning Important to Manage an Education Loan?

Image by freepik

Financial planning involves developing a strategy to handle your finances and get ready for upcoming expenses by evaluating your current situation and establishing goals. For instance, if you aim to purchase a home in five years, a well-structured plan will assist you in directing your savings and investments.

Ever wonder why some people achieve their financial goals effortlessly while others struggle? The secret often lies in effective financial planning, which helps you make informed decisions and map out your financial future.

Why Financial Planning Matters in Education Loans?

Financial planning is crucial when considering education loans, as it helps you manage costs and avoid overwhelming debt. By creating a clear strategy, you can make informed decisions that align with your educational and career goals.

10 Steps in Financial Planning for an Education Loan

When you are taking an education loan, here are a few important steps that you must take as part of a well structured financial planning:

1. Choosing your Course

Taking a loan shouldn’t be about traveling abroad. It’s important to choose a course that genuinely interests you and can lead to a fulfilling career. Don’t allow the actions of others to distract you from following a path where you can truly thrive.

For instance, a student pressured into engineering may struggle, while one passionate about law could thrive and build a fulfilling career. It’s essential to research your course thoroughly and explore potential career options to ensure you can secure a job and repay your loan.

2. Assess the Total Cost of Education

Understanding all the costs associated with your education will give you a clear view of your funding requirements including expenses, tuition fees, accommodation, study materials and books, living expenses, and miscellaneous expenses.

3. Determine Your Borrowing Limit

After assessing costs, determine the maximum loan amount you should consider. Avoid borrowing the maximum loan amount if you have other means to cover some expenses, as this will reduce interest and repayment burdens.

4. Understanding the Types of Education Loans Available

Education loans vary widely, and understanding these differences can help you choose the best option based on your financial circumstances and course of study.

a. Government Education Loans

Government-backed loans often come with lower interest rates and favorable repayment terms, especially for students from economically weaker sections.

b. Private Education Loans

Private lenders like banks and NBFCs offer more flexibility but may have higher interest rates. They can be a viable option if government loans don’t fully cover your expenses.

5. Choosing the Right Interest Rate and Repayment Plan

Choosing the right interest rate and repayment plan plays a critical role in managing your finances efficiently. You must compare Fixed and Floating Rates:

• Fixed Interest Rate: Provides predictable payments but may be slightly higher.
• Floating Interest Rate: Rates may fluctuate; this can be beneficial if you expect lower rates in the future.

Example: If you borrow INR 5,00,000 with a fixed rate of 9% for a 10-year tenure, your monthly EMI will remain constant, whereas with a floating rate, it may vary depending on market conditions.

6. Explore Moratorium Periods

A moratorium period, typically offered in education loans, allows you to start repayment after a grace period, usually six months to a year after completing your course. Make sure to choose a loan with an adequate moratorium period to ensure you can start repaying comfortably once employed.

7. Planning for Repayment

Understanding EMI (Equated Monthly Installment) and calculating it in advance can help you decide if your expected post-graduation income will cover your repayments.

Use an EMI calculator, often available on bank websites, to explore different combinations of loan amounts, tenures, and interest rates. Decide the variables as per your requirements and arrive at an EMI that best suits you.

8. Building a Budget for Loan Repayment

Budgeting is vital, as it helps you prepare for loan repayment while balancing living expenses.

Start by prioritizing essentials—rent, food, travel, and insurance. Only borrow what you need, and account for interest accumulation during the moratorium.

Do set up a repayment fund. Creating a fund for future EMIs during your course can ease your financial burden post-graduation. Aim to save a small amount each month, even if it’s just INR 500, to kickstart your repayment journey smoothly.

9. Alternative Funding Options to Reduce Loan Burden

Consider alternative funding sources to reduce the amount you need to borrow.

10. Considerations for International Education Loans

Studying abroad often involves higher expenses. International education loans cover additional costs but require a different planning approach.

1. Exchange Rate Fluctuations: Track currency exchange rates and account for fluctuations.
2. High Living Costs: Factor in the cost of living in the foreign country and health insurance.
3. Repayment Currency: Be aware of the currency in which you’ll repay your loan, as it can impact the EMI based on the current exchange rate.

Example of Additional Costs for Studying Abroad

Financial Literacy: A Key Component in Loan Management

Understanding financial concepts, such as compound interest, EMI calculations, and budgeting, is invaluable when managing an education loan. Many lenders offer financial literacy programs to help students plan effectively.

Understanding how compound interest works is highly crucial. Compound interest can significantly increase your debt if not managed well. Learning about it can help you make prepayments and reduce the overall interest burden.

EMIs are another major area that need to be managed well. By learning how EMIs are calculated and exploring prepayment options, you can manage loan repayment efficiently and reduce the total interest paid over time.

The Role of Parents in Financial Planning for Education Loans

Parental guidance in financial planning can add an extra layer of security and insight into handling loans. Here’s how parents can assist:

• Joint Loan Application: Most education loans allow parents to co-sign, often resulting in better interest rates.
• Early Repayment Support: Parents can support early repayment if possible, reducing the debt burden.

Financial planning before taking an education loan is a powerful tool that sets you up for success, ensuring that you can focus on your studies without financial stress. By assessing costs, budgeting, exploring alternative funding, and understanding loan repayment, you can make sound financial decisions that will benefit you long-term.

Education loan is an easy financing option that can help students realise their educational dreams. Look for lenders that provide easy, hassle free loans with no cumbersome processes, easy checks and without collateral. Check out Propelld Education Loan that fits all these criteria.

Why Propelld?

Here are some more reasons for choosing Propelld:

FAQs

1. How much should I borrow as an education loan?
Only borrow what is necessary to cover tuition, living expenses, and essentials. Avoid overborrowing to minimize future debt.

2. Are there any tax benefits for repaying education loans in India?
Yes, under Section 80E of the Income Tax Act, interest paid on education loans is tax-deductible.

3. Can I start repaying my education loan while studying?
Yes, some students choose to make interest payments during the moratorium to reduce overall interest accumulation.

4. How does a moratorium period affect my loan?
During the moratorium, interest accrues but repayments are not required. This period allows you time to complete your studies before beginning repayment.

5. Can I switch my education loan to another bank for better rates?
Yes, refinancing or balance transfer options are available, but ensure they offer better terms and lower interest rates before switching.