8 Steps to Take if You Are Struggling to Pay an Education Loan

An Education Loan covers all the study-related expenses incurred during the course duration. For example, it generally includes admission fee, tuition fee, hostel fee, library fee, cost of books, a laptop, and travel tickets (if you are studying abroad). A student can apply for an education loan from a bank or NBFC along with his/her parents, guardian, or guarantor. A student is considered as the main applicant and the guarantor as the co-applicant. After completion of any course or degree, repaying the Educational loan is the second most important concern in student's life.

Different banks and Non-Banking Financial Companies (NBFCs) charge a different rate of interest on education loan, which can range from 6% p.a. to 18% p.a. A student has to repay the loan immediately after completion of the course. Typically, the banks/financial institutions give the students six months' time after completing the course to start paying the EMIs. This exempted time to pay the EMIs is called the moratorium period. A student or a parent/guardian has to pay a simple interest charged by banks/other financial institutions during the study period. And, after the relaxation period of 6 to 12 months, a student is liable to repay the loan.

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However, it can become more challenging for students to repay the education loan if they do not land in a good job within the moratorium period. Due to the current COVID-19 pandemic, recent graduates are struggling to repay their education loan. If you are amongst those, then here are the few steps to take to repay your education loan that will help you to improve your financial discipline.

1. Extend the Loan Tenure:

If you do not have sufficient income to pay your EMIs, then you can negotiate with the lender on lowering the amount of your EMIs by extending the loan tenure. You can extend the loan tenure from 5 years to 10 years, depending on the type of education loan. Most lenders have a maximum loan tenure of 10 years for a secured education loan. Whereas, it is 5 years for an unsecured education loan. The higher the loan tenure, the lower will be your Equated Monthly Instalment (EMI). Although extending the loan tenure makes the EMIs look more affordable, you end up paying more interest with an increased loan tenure. Therefore, extending the loan tenure is advisable only when the monthly EMI burden is not manageable.

2. Pre-pay If Possible:

Paying the interest during the education and moratorium period will help you reduce the debt burden in the future. Therefore, if you are working part-time or if your parents or guardians can afford it, then it is advisable to pay as much as you can during the course of education and during the moratorium period. Furthermore, most lenders allow pre-payment or foreclosure of education loans without any charges. Hence, once you start working, it makes sense to pay as much as possible, instead of repaying only the EMIs.

3. Increase Your Earnings:

It is advisable to start working part-time and pay at least the interest amount while studying, so that later the repayment becomes a little easier. With a new job, increasing net earnings might not be possible for everyone, but you can try to do a side hustle, monetise your hobbies, negotiate for a salary increment, etc. and ensure that you get debt-free at the earliest. The extra income you earn can be used to repay your loan earlier or you can save that amount to foreclose any loan in the future. The increased earnings will also help you reduce your debt to income ratio, which ensures a better credit score.

4. Take Help From Your Close-ones:

If you are unable to make the repayments on time, do not hesitate to take help from friends and family. The biggest benefit of it is that you get instant money without having to pay the high interest on it. However, it is advisable to pay off the loan taken from your closed ones before the promised repayment date. Doing so will help in keeping the relationship healthy and they will not hesitate to help the next time you require the money. However, it is equally important to not take it personally or not let it damage your relationship if they are unable to help you at this time.

5. Negotiate With Your Lender:

If the rate of interest on your education loan is very high compared to other lenders, then it is advisable to try to negotiate it. If you have good relations with the lender along with good credit history, the lender will surely consider your request and reduce the rate of interest on the loan amount. Hence, it will lower the amount of premium and reduce your debt burden.

6. Refinancing:

You can consider transferring the balance amount to another lender or refinancing the amount only if a new lender is offering a lower rate of interest or other better loan terms than your existing lender. While refinancing, apart from the rate of interest, you should also consider pre-payment or foreclosure charges of your existing loan, processing fee for the new loan, and other hidden charges.

7. Control the Expenses:

The lifestyle change is obvious once you start earning. However, increasing your earnings and extending the loan tenure will not be of any help if you live a lifestyle that is not in accordance with your income. Not being able to control your spendings is the primary reason why it becomes difficult for many people to be debt-free. It is advisable that until you pay off your education loan, cut down unnecessary expenses and luxuries like expensive dinners and holidays, buy expensive consumer durable items such as clothes and gadgets, etc.

8. Limit Your Credits:

Apart from being the financial goal dearest to your heart, buying your own house and car are usually the biggest purchases in life. As real estate and automobile prices can be exorbitant, most people prefer to buy a house and car with loans. However, it is very important that you do not avail of any new loans unless you pay off your education loan. Taking more loans can put you in a situation of debt overhang that can mentally affect the borrower and might lead to severe depression or suicidal tendencies. Furthermore, it is also important to use your credit card wisely or avoid using it as the reckless use of credit cards can lead to a debt trap.

To Conclude:

An education loan is the first loan that most people take even before they start earning. Hence, it plays an important role in creating the credit history of the borrower. Therefore, it is advisable to timely repay the education loan. The steps discussed above will help you manage the seamless repayment of your education loan and save on the interest outgo.

Warm Regards,
Ketki Jadhav
Content Writer

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