Education loans have emerged as a highly favored mode of financing for students. In the last 10 years, over 4.60 lakh students have availed of education loans to pursue their studies abroad. Although loans are easily available these days, their repayment can be a daunting task for many. The responsibility of repaying an education loan can significantly impact one’s financial freedom until they clear the debt. Therefore, it is important to plan and manage finances effectively to ensure that loan repayment does not become a burden.
Why do students avail of education loans?
Education costs are rising rapidly. In India, education inflation was around 11-12% in the last decade, double the CPI. This has led to an increase in education loan applications as more people are struggling to save for their education and unwilling to give up on their dreams.
So, how do you repay your education loans?
Use SIPs to repay education loans. By investing in mutual funds, create a corpus to pay off the loan early. For example, Vijay takes a loan of Rs. 25 lakh for 10 years at 10% p.a., paying an EMI of Rs. 33,038 per month.
Vijay wants to prepay his education loan to save interest, but he doesn’t have adequate funds. To overcome this, he decides to invest a small amount regularly in mutual funds through an SIP. Vijay starts with an investment of Rs. 3,304 p.m., 10% of his EMI, with an expected return of 12%. By doing so, he can repay his loan in the 102nd month, saving 18 EMIs valued at Rs. 5,94,678 and an interest of Rs. 44,574. Increasing the SIP amount to 25% doubles the number of EMIs Vijay can save. By steadily increasing the SIP amount, Vijay can repay the loan early and save more in terms of EMIs and interest. For instance, if Vijay increases his SIP amount to 100%, he can repay the loan in just 48 months, saving 72 EMIs valued at Rs. 23,76,696 and an interest of Rs. 1,77,464.
SIPs are a great way to invest and save. If you have an education loan and haven’t been able to save enough, start investing to become financially independent.
