Managing High College Education Costs

In Financial Planning by Sweta Gupta0 Comments

Naturally, most young people have no other option but to take a bank loan to fund their higher education.

What are ADVANTAGES and RISKS in taking a loan?

a) Advantages of Education Loan

  • Benefit from tailored loan packages geared for students
  • Availability of discounted loan fee structure
  • Waiver of repayment penalties
  • Lower, fixed rates of interest than regular loan
  • Manageable & attractive loan agreements
  • Presence of subsidized loans
  • Opportunity of building strong credit history

b) Risks of Education Loan

  • Obtaining unsuitable or insufficient loans
  • Not being aware of different schemes & associated risks
  • Wrong analysis of long-term loan suitability
  • Mounting financial pressure in the absence of timely repayment
  • No assistance from banks for resolving repayment schedule
  • Missed payments quickly escalate to loan defaults

How to Manage Cash Flow Post-College if You Have a Loan?

Managing a steady cash flow in the post-college years can be doubly difficult if you are juggling a student loan with regular expenditure. While paying off the loan should always be your priority, it should not be the end of all and be all of things. After all, you need to consider the security of your financial future too. You have just two options:

  • Prepay the education loan
  • Start investing for future

Your future investments should contain the exact amounts that you are using for paying off your student loan. Remember, this is not the first loan that you will be taking in your life. Later on will come home loan, car loan, and perhaps a personal loan. So, the way you deal with student loan repayment can create precedence for you. Doing it in a planned and organised manner is extremely important.

Let’s consider a scenario. Say, at the beginning of your career you are earning Rs. 75,000 monthly salary after tax deductions. Now if your student loan monthly payment amount is Rs. 20,000, you can opt to pay a higher EMI of Rs. 30,000. If you pay Rs. 10,000 extra, as the pre-payment amount, soon you will be able to get rid of your student loan. Later, you can invest Rs. 30,000 in Mutual Funds, building up a good corpus in the long term.

Another option for you is of course to pay back the monthly Rs. 20,000, while investing the balance Rs. 10,000 in a Systematic Investment Plan (SIP), so take your pick. Still, pre-payment is a good idea, simply because doing away with your student loan early on will help you to grow in confidence and develop a stronger financial foothold for the future.

How Mutual Funds Help?
Students can ensure their future financial security after repayment of the loan through mutual fund investments. Ideally, mutual funds should offer a balanced equity-debt ratio with SIP. Also, parents can take away the financial burden of college education by investing in Mutual Fund’s Child Plans early on.
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