Home/ Money / Personal Finance/  Starting your career with a student loan to pay back

Chaitanya Hemrajanai was overjoyed to secure a placement offer from a global smartphone company even before completing his college last year. However, the 26-year-old had a major responsibility from day one of his job—pay back a loan of 19 lakh that he had taken to finance his MBA.

Much like Hemrajanai, many young professionals are increasingly funding their education through loans. Even though an education loan is considered ‘good debt’ because of the tax sops and education is believed to be an investment in itself, starting one’s career with a large debt calls for robust financial planning from the beginning, say experts.

“The younger working population is quite aspirational in the sense that they are not afraid to take loans to fulfil their dreams. Unlike previous generations, they have fewer liabilities at the start of their career and instead of just earning and saving for future financial goals, much of what their parents did, they are willing to take financial risks to walk their own path. However, without a plan, starting out with debt can have long-term impact on personal wealth creation," said Rohit Shah, founder and CEO, Getting You Rich.

Financial planners advise prioritizing loan repayment as interest component eats into your earnings. “If a young professional starts with a good income package, it is prudent to consider a repayment strategy that can reduce the loan tenure. Many borrowers often opt for a longer tenure as the monthly instalments get smaller. However, shorter repayment tenure even if the EMI is bigger is advisable so that the loan can be repaid sooner," said Prableen Bajpai, founder, FinFix Research & Analytics.

Delhi-based Sanyam Trivedi is doing exactly that. About 40% of his monthly income goes towards paying the 18.95 lakh loan he took for his masters and he wants to increase this allocation to 55-60% of his income to repay the loan quickly.

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Shah said the simplest and most efficient way to strategize loan repayment is by making it a goal. “Say, one wants to repay a 5-year loan in 3 years. Once you set a goal, you can work backwards to find out how you should set up the corpus; whether you want to use your yearly bonus, how much you need to save on a regular basis, should you supplement your income if the current earning is not enough."

When people chart out a repayment strategy and stick to it, they automatically learn to budget and prioritize saving over spending.

Trivedi is a case in point. “I use lump-sum saving every three months to make pre-payments towards the loan. It helps cut down my long-term dues," said Trivedi.

It is worth noting that interest saving is higher in the earlier stages of the loan, so the earlier you repay, lesser will be your interest outgo. Hemrajania made an upfront pre-payment of 6 lakh soon after the loan repayment kicked in, which brought down the EMI liability from 39,000 to 25,000.

“I had savings of about 3 lakh from my previous online ventures, which were invested in the stock market for about three years. In January, I liquidated my investment to repay a part of the loan so that it becomes easier for me to pay the EMIs," he said. Now, Hemrajania is in no hurry to repay the 7-year loan because he sees the tax rebate on interest as a benefit. Note that the tax deduction of interest paid on an education loan is available only for eight years starting from the year in which repayment starts.

Debt repayment should not be done at the cost of investing. This is because starting early presents more investment opportunities as the investor has time on his/her side. A systematic investment plan (SIP) started today, for say 10 years, will most likely fetch you better returns in terms of rupee cost averaging than what it will be for five years starting after five years from now.

According to Ankur Maheshwari, CEO, Equirus Wealth, a hybrid approach of repaying the education loan and also investing for future is the right way. “Young professionals can have an aggressive portfolio with higher allocation towards equities. This helps in two ways; one, normally the return expected from equity as an asset class over the long-term period of seven to 10 years is expected to be higher than the rate of interest one is bearing for education loan. Second, a late start in investing leads to the loss of benefit accrued from power of compounding in the later years."

Bajpai said contribution towards loan payment and investment would vary depending on loan amount, EMI, salary package, monthly household expenses and other liabilities. Despite that, at least 10-15% of monthly income should be set side as saving even before you spend. “A good starting point is budgeting; making a list of expenses, especially discretionary spending to identify the areas where expenses can be curbed," Bajpai said.

The next step should be to create an emergency corpus that can cover at least eight months worth of your expenditures and EMIs. “Once budgeting is done, it is essential to start putting away a portion of one’s income towards creating a contingency fund," she said.

Shah concurred and said, “Saving up for contingencies is no longer an option. Especially in today’s job market, it’s a must for everyone across income and age groups."

Next, however small, regular savings will come in handy for future goals. For instance, Hemrajanai wants to buy a car and also create a corpus for starting his own venture. He plans to do both over the next four to five years but is saving only 15,000 per month without an asset allocation plan. “I am left only with a small amount to invest after all the expenditures. Luckily, with the current work from home setting, I am able to save and invest. I invest directly in stocks and mutual funds."

Bajpai suggested that he should first build an emergency corpus, which will cover his loan EMIs when he quits his job to start his business. “He should avoid increasing his debt burden by taking a car loan until his education loan is repaid," she said.

Trivedi, on the other hand, in the absence of any short- to medium-term goals is putting away surplus income towards creating a contingency fund and for retirement through National Pension System.

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Updated: 28 Oct 2021, 08:15 PM IST
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