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| Recession pressure on repayments |
| Meenakshi Subramaniam / Mumbai Apr 19, 2009, 00:05 IST |
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Students with educational loans could be feeling jittery because of the Uncertain job market. Here's some advice
Students, who have taken an educational loan for further studies, suddenly may not be feeling very comfortable. With the economy staring at a downturn, the job market does not look so lucrative anymore.
Already, reports suggest premier management institutions like the Indian School of Business, Hyderabad and some Indian Institutes of Management have extended their placement season because many offers are not lucrative enough. Also, many of the big recruiters are missing-in-action.
Given this backdrop, 'study now, pay later' may not seem like a great idea anymore, at least for sometime.
Also, most of these premium institutions have chosen to hike their fees. So for prospective students the tough question is should they take an expensive loan, even before starting their career.
Yes, things do look grim. But then, a good course also ensures that you are armed with the best degree when entering the job market. So don't turn the loan into a load. Here's some help on how to structure this loan. For starters, there are three options, which can bring down the interest cost.
Banks charge 1 per cent less interest in three circumstances - if the loan is paid during the study period, if the entire interest cost is paid within the course tenure and if the entire loan is paid off within one year of completion of the course or six months of getting the job, whichever is earlier.
Another advantage of choosing the three above options is that banks charge a simple interest rate. However, many students may not be able to follow these routes.
If you are worried about repaying, follow these few simple steps to cut costs and make the process simpler.
Lower interest cost: Find out whether the bank is charging interest on monthly basis or quarterly basis. That is, check whether the bank is asking you to pay interest every month or every quarter. Request the bank to change from monthly to quarter basis. Thus, in case of an immediate crisis, you get the window of repaying every quarter instead of the monthly outgo.
Shift to another bank: If the first strategy does not work, you can transfer the loan to a bank that is charging interest on daily reducing balance and not, annual reducing balance. The benefits would be visible because the interest cost would go down substantially. But remember that for switching from one bank to another, there is a one per cent charge of the loan amount.
Reduce expenditure: Every year, the bank asks for an estimate of expenses, for determining how much loan amount is to be sanctioned. Use this opportunity to reduce the loan size. For example, use the loan for buying books, tuition fees, examinations fee and hostel charges. But try and avoid minor items like project thesis, library fees and annual day uniform. In another year, leave out things like study tour.
Tapping own resources: One can get an overdraft from bank against a LIC policy, NSC or property, to repay the education loan. It turns out to be a cheaper option, as interest is on the amount taken is higher.
Make a tax claim: Once, you get a job, make full use of income tax provisions, to recover money spent on education loan. For example, the entire interest payment, which goes towards education loan, can be claimed under Section 80E of the income tax act every year.
This process can go on for eight years. Previously, only Rs 40,000 was allowed.
But now the tax benefits are available from the very year the loan repayment starts. For example, if loan is repayment has started from June, 2008, exemptions can be claimed till 2014-2015.
Another provision allows parents to claim the interest paid towards son's education loan, in their own return, for seven years. In past, this was not possible. Hence, father can pay loan amount, here and clinch income tax deduction.
Interestingly, a wife too can now pay interest of husband's education loan and get tax benefits. Even the in-laws of a boy or girl are also allowed to repay study loans and get tax exemption.
The good part is that banks are quite rewarding with customers, who show a genuine intent towards loan repayment. They give them 0.5 per cent - 1 per cent discounts.
On securing a job, start paying back education loan, from first month's salary, itself. However, in these market conditions if your salary expectations have not been matched, it's better to spread the loan repayment over a period of time. In fact, try to ensure that monthly payment does not exceed 30 per cent of take-home pay.
This will reduce the burden on monthly salary. You can always hike the equated monthly instalments at a later date.
Of course, the good news is that banks are aware of the pressures that students could be facing in this job market. As a result, recent reports point to the fact that they are willing to increase both the moratorium and repayment period. And that would mean some relief for students.
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