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When it comes to higher education, one of the wisest way of funding it is by taking an educational loan. “There are several perks of it," said Amit Trivedi, personal finance coach, speaker and author of Riding the Roller Coaster.
“First of all, as the student becomes aware that he/she has a loan to pay, he/she tend to be more responsible."
“Second, you can avail tax benefit for having an educational loan." The interest paid on the education loan is allowed as a deduction under Section 80E of the Income Tax Act, 1961. This deduction is available for a maximum of 8 years or till the interest is repaid, whichever is earlier.
“Third, in case the parents do not have separate fund for their children education, they do not have to dip into saving meant for other life goals," Trivedi added.
Now, as much as availing education loan can be advantageous in many cases, Deepak Krishnan, financial planner at Mangrove Wealth, said, for any kind of loan, it makes sense to knock off fast.
Since, one gets tax advantage from it people have the tendency to keep them hanging for long. Moreover, education loan is around 7 to 8%, meanwhile, if you invest instead (after paying the EMI) you might earn much higher returns. “So investors put money in bull markets and let the loan continue" he added.
Now, as much as this is good strategy for the bull market, during the bear market, it won't work. “Hence, I would say that it make sense to knock off loans and be debt free as early as possible," Krishnan asserted.
Things you should follow in case you have an educational loan:
Start paying off early: The student should ensure that the moment the education is over he/she starts repaying the loan. It might pinch the pocket initially as job scenario is always subjective but after a few years when the income levels goes up, it's better to have repaid the loan than having it.
Pay in lump sum whenever possible: Try to repay in a chunk amount when you get a lump sum, like a bonus. If there are other commitments then make sure you to keep a part of it for the educational loan.
Try paying small amount during moratorium period: The students are not required to make any repayments during the moratorium period, i.e. the time during the course plus one year after the course, or six months after finding a job, whichever is the earlier. However, students should be encouraged to take odd jobs to make repayments during the moratorium period at least the interest amount. Since, the interest amount do not get incurred, the burden lessen afterwards.
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