How to Plan Your Abroad Education Loan Repayment?

Planning how to pay back an education loan is a crucial step in managing your future financial health and ensuring a stress-free journey toward repaying your loan. Whether you have taken an education loan to study abroad or pursuing higher education in India, understanding how education loan repayment works holds great importance. Keep reading to discover the education loan repayment procedure and education loan repayment rules in India options from different lenders.

Education Loan Repayment Process of Different Lenders in India

Often students wonder when and how to repay the education loan. Nonetheless, they know that education loan borrowers are entitled to a moratorium period. Ideally, during this period, the borrower does not have to make any loan repayment. This is the time between the end of the course and the start of a job. RBI has asked banks to give a moratorium period of one year after the completion of the course. Thinking about how does education loan repayment work in India? Well, education loan repayment starts after the moratorium period is over.

After the completion of the moratorium period, applicants are required to plan on how to start repaying student loans and pay their EMI. It is essential to stay on top of your loan repayment game to avoid any negative impact on your credit score/CIBIL score or future loan applications.

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Education Loan Repayment Modes

Applicants can repay their education loans through various methods, with banks supporting multiple payment options.

1. Electronic Clearing Service (ECS)

Monthly installments are automatically debited from the borrower’s bank account. Ensures timely payments without the need for manual intervention.

2. Post-Dated Checks (PDCs)

Borrowers provide checks dated for future months. Suitable for those who prefer traditional payment methods.

3. Online Banking

Payments can be made through the bank’s online portal or mobile app. Convenient and allows borrowers to manage payments from anywhere.

4. Demand Draft (DD)

Borrowers can issue a demand draft in favor of the lending bank. Useful in scenarios where electronic payments are not feasible.

When Education Loan Repayment Starts

Education loan repayment typically begins after a moratorium period, which usually includes the duration of the course plus an additional grace period of 6-12 months. This grace period allows graduates to secure a job and start earning before they begin making repayments.

Can You Repay Education Loan While Studying Abroad?

The need to repay or not while studying depends on the payment option available to you. Once students know the number of EMIs they have to pay to repay their education loan, the next question that crosses a student's mind is whether he/she has to start repaying the loan while studying. Students need to know the education loan repayment period, how do I repay my student loan and the different repayment options to plan their loan repayment intelligently.

Lenders in India have different policies for repayment during the moratorium period and education loan repayment tenure. They are as follows:

Students have to pay zero interest during the moratorium period.

Students have to pay partial interest during the moratorium period.

Students have to pay full interest during the moratorium period.

Students have to pay partial EMI during the moratorium period.

To understand how is education loan repaid and the difference between the 4 repayment plans, let us take the following example -

This means that for Mr A: 

The table clearly shows that your repayment option varies with lenders. The student need not start repaying in the moratorium period in the case of education loans from public banks.

Will You Earn Enough To Repay Education Loan?

Earning a job to repay the loan within the moratorium period is always at the top of a student’s mind. To ensure a well-paid job, the student must start researching jobs at the beginning of the final year. It is better to research in advance and study a course that ensures well-paying job opportunities to reduce loan repayment anxieties.

GyanDhan’s estimated future earning tool would help the students by comparing their earnings against EMI. Based on their course, college ranking, loan amount, and approximate expected annual salary, this tool will help them know their approximate savings and, consequently, the ease with which they can repay their education loan.

To explain further, let’s look at three different cases for Mr. A in the above discussion.

Situation 1 - Mr. A is working in the US & earning $80,000 per year. His typical disposable income is around 35%, and he is expected to save about $ 2,300 per month. It means that he can save INR 1,45,000 a year.

Based on the above numbers, he can easily pay EMIs. He can even pre-pay to save interest.

Situation 2 - Mr. A is going for a Ph.D. and will earn $25,000 to $30,000 per year.

His EMI will start after 6 months. To repay the loan, he will have to cut expenses and serve the EMI from the stipend. Mr. A didn’t get a job in the US and is working in India now. He will earn INR 1 to 1.5 Lakhs per month.

In this case, life will be a bit hard, as one-third to half of his earnings will go into EMI for the education loan.

Estimating the future earnings against the repayment amount is a wise move to avoid big disappointments. For a well-structured calculation, check your earnings with GyanDhan’s estimated earning tool.

What Will Happen If You Default On Your Education Loan?

The chances of an education loan becoming a Non-Performing Asset (NPA) are real. In simple words, an NPA is a loan on which the borrower has failed to make principal and interest payments during their education loan repayment period. Defaulting on an education loan can have several consequences, including the following:

If you fail to pay your EMI for 3 consecutive months, the bank will classify the loan as NPA. 

The borrower’s collateral will be at risk. The bank may seize your collateral and use it to recover the loan amount. 

Once the loan is classified as an NPA, the credit score of both the borrower as well as co-applicant will be affected. This will reduce your and your co-applicant’s ability to borrow money in the future. 

A wise education loan repayment plan begins soon after disbursal, all it requires is a combination of planning and diligence.

Top 7 Tips On How to Repay Education Loan Effectively

Now that you have understood how to pay education loan, it is crucial for your to also understand smart tips on repaying education loan. Below are seven effective tips that will help you understand how to pay back education loan and repay your loan early with maximum savings.

1. Analyze your financial condition and decide whether you can afford to pay the total or partial interest during the moratorium period. This analysis will help you get a clearer picture of the financial liability and your ability to repay, and thus help you plan and repay in an organized manner.

2. Capitalize on features such as margin money, lower interest rates for women, benefits of schemes like Rinn Raksha, Interest subvention by banks for differently-abled or economically weak students, and make use of various subsidies offered by the government.

3. Take the loan amount in installments rather than in one go. This is because the interest is calculated on the amount disbursed and not on the amount sanctioned. Hence, taking loan amounts in installments will help students to reduce their interest burden.

4. Opt for fixed interest rates when taking an education loan. Students read here to know how their interest rate can change and thus affect their EMIs. If they have already opted for a floating rate of interest, we suggest they understand interest fluctuations and plan for increments.

5. Consider transferring the existing education loan to a new lender with a lower rate of interest. Once a student gets a job, their profile improves, and lenders agree on a loan takeover by offering a reduced interest rate. This will again help lower the EMI that the students need to pay.

6. Section 80E of the Income Tax Act, 1961, provides tax benefits to individuals who have availed of an education loan for pursuing higher education abroad. By claiming the tax benefits under section 80E, the borrower can significantly reduce their taxable income and save on income tax. It is advisable to carefully understand the eligibility criteria, documentation requirements, and other details before availing of the tax benefits under section 80E.

7. Foreclosure of an abroad education loan means paying off the outstanding loan amount in full before the due date. It is a process of early repayment of the loan, where the borrower makes a lump sum payment to the lender to clear the entire outstanding loan amount. Foreclosure can be initiated by the borrower voluntarily, or it can also be done by the lender in case of default or non-payment of the loan amount.

How Pre-Planning Education Loan Repayment Help You Save Big?

An early education loan repayment plan can benefit students in their loan repayment journey. By increasing the amount they pay back to the lender, students can significantly reduce their financial liability. We at GyanDhan, encourage students to be mindful of their expenses while studying and to utilize any potential earnings they can generate during their studies. 

There are several ways in which students can lower their education loan repayment burden while studying:

1. Loan Repayment during your Studies: If possible, making small loan education loan repayments during the study period, even if it's just the interest, can help reduce the overall burden. This approach can prevent interest from accruing and reduce the principal amount borrowed.
    
2. Part-Time Employment: Taking up part-time jobs or internships can help students earn income to contribute towards their education expenses. By utilizing their free time effectively, students can reduce their reliance on loans and offset some of the costs. For example, in the USA, the stipend for assistantships is approximately $12 per hour, and students are allowed to work a maximum of 20 hours a week. A student can, thus, easily earn between $900 to $ 1000 a year. This translates to INR 58000 to INR 65000 - the money that can be used to repay a part of the education loan!
    
3. Internship During the Summer Break: Students are allowed to do an internship during their summer break. It helps them get relevant industry experience and earn between $3000 to $ 5000 to pay a part of the education loan.

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How Does Refinancing Help You?

Refinancing your education loan can significantly ease your financial burden compared to extending the repayment term. This approach allows students to negotiate for lower interest rates once they secure employment, potentially reducing a 13% interest rate on an unsecured loan to 11.5%. Such a reduction not only decreases the monthly installment amounts but also lessens the total interest paid over the life of the loan.

Effective planning for your abroad education loan repayment is crucial. A key component of this planning involves understanding how to repay student loan, which includes familiarizing yourself with the start of repayments, interest accrual, and payment structuring. You can develop a solid repayment plan by crafting a budget, exploring various repayment options, prioritizing your payments, and obtaining professional advice. This disciplined approach on how to repay education loan and financial management is vital for maintaining long-term economic stability and achieving goals beyond merely repaying your student loan.

Additionally, when it comes to education loan assistance, GyanDhan is your trusted partner who can provide invaluable support. We offer expert guidance on how to pay education loan and how to pay back education loan, ensuring that you understand all your options for repayment. With our expert education loan counselors and a commitment to securing the best education loans for students. We offer a personalized and comprehensive approach to education loan guidance. Our experts can help you compare loan products, find the most competitive interest rates, and navigate the loan application and repayment process. So take the first step towards your abroad education dreams and check your loan eligibility for free.

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