Getting a good college education can be one of the most life-transforming experiences in anyone’s life. However, with education costs rising sharply, it is not always possible to cover education costs with your savings or scholarships. In such scenarios, students increasingly turn to student loans to fill the gap. With so many options on the market and other complexities, it is often difficult to navigate.

To objectively assess loans, you need to go beyond simple default rates and repayment schedules. You need to delve deeper into the course you plan to take and assess it against the total loan amount you are looking for. Finally, you need to honestly assess your ability to repay it. It’s the first big financial decision you’ll make to start your life, so it’s imperative to give it some serious thought.

To get started, you need to consider the potential of the course and institute you choose. Research the college / institute you are considering thoroughly, make sure that it is not blacklisted by any bank for loans. Many banks have a pre-approved list of accredited universities. Continue by assessing your employment prospects after graduation. How much you are likely to withdraw after graduation should be a determining factor for your loan, as loan repayment would be easier with better pay. Think carefully about how much you need to borrow.

Interest rates are determined by the amount of the loan – the larger the amount borrowed, the longer the payment period and the lower the interest rates. Shorter term loans seem heavy on the pocket but save you from paying large sums of money over an extended period of time.

In most student loan repayment cases, your payment amount is first applied to interest and then to the principal amount you borrowed. In the event of late payment, the late fees are first taken into account when reimbursing. As with other loans, when your principal goes down, the interest you pay also goes down, as most banks only charge interest on the remaining balance. So, over time, the ratio of your payments to principal becomes progressively larger.

Evaluate the bank’s flexibility regarding the moratorium period or the lengthening of the payment term. It is good to plan and pay interest during this time to prevent interest from accumulating. In some cases, you may want flexibility on the moratorium as you may still be in the process of resolving your employment situation.

Besides the obvious costs of higher education such as tuition and accommodation, another cost that students should consider when obtaining loans are indirect or opportunity costs. So, for example, if you decide to give up a year to travel, you are not only spending on travel or food, but you are also losing the money you would have earned if you had been employed during that time.

Opportunity costs should be taken into account when considering a loan, as interest paid on student loans is fully tax deductible under Sec 80E, provided the loan is taken from a regular bank. or suppliers approved by the income tax service.

For example, if a person has Rs 1lakh that could be invested to earn a 9000-9% return in interest; Instead, opt for an educational loan for 1lakh – the interest paid at a rate of 10 percent per annum would rise to 10,000. With a 20% tax saving bracket, they would save Rs 2,080, thus effectively paying an interest of Rs 7920. Thus, the opportunity cost would rise to Rs 1080. These numbers will change with the returns earned, the interest paid and the tax bracket when the loan is repaid. So while it’s tempting to increase your monthly IMEs to get off debt sooner, it’s probably not the best decision in the long run. However, this is not an easy question to answer.

There are many factors and variables to consider before deciding to opt for a student loan and deciding on your repayment schedule. However, what is most beneficial is to start investing early in long-term instruments such as equity mutual funds, which in the first place can help you avoid taking out a loan to continue your investments. studies.

For example, you start investing Rs 10,000 per month today for 10 years. With an average of 12% returns per year, you will have accumulated up to Rs 23 lakhs, which is enough to run an MBA in India.

By, Anup Bansal, Chief Investment Officer, Scripbox