When it comes to investing, we are repeatedly told to start early, preferably in our early 20s. This so that we are financially prepped for bigger challenges like being able to afford a Home Loan in our 30s.
But not all of us kick-start our careers in our early 20s. There is a master’s course to be pursued. Some of us get to it right after college, while some others take a short break from the corporate world to get back to studies. Either way, if you wish to get your degree from a renowned college, you should be prepared to shell out some big money. This is when an Education Loan will come to your rescue. However, taking an Education Loan will put some of you in debt even before you start earning.
So, once you complete your education, what should you do first? Pay your Education Loan or put money into a lucrative investment plan? The answer is, both! Give your Education Loan priority but do not neglect your investments.
We all know that loans come saddled with heavy interest rates. Extending the tenure of your Education Loan or missing payments is only going to make the burden heavier to carry. So, channel a chunk of your resources towards the repayment of your loan and then direct the remaining money toward your investment and savings plans.
Easy to say, but how do you work this strategy out?
Most likely, your loan EMIs will kick in 6 months after your get a job or 1 year after the completion of the course you are pursuing (whichever is earlier). Either way, EMIs must be paid. Missing your loan repayments will not only attract penalty charges, but it’ll also hurt your Credit Score. Now you don’t want your Credit Score getting hurt with your very first loan. After all, as your life progresses, you might need to apply for a Personal Loan, a Home Loan, a Car Loan, etc. Treat your Education Loan well and in the future, banks will treat you better when you request for financial help. A good way to avoid missing EMI payments is by automating the payment process. Set up an auto-debit instruction on your account and repayments will go through on their own. Just ensure that you have enough funds in your bank account for the payments to go through successfully.
Once you start working, it’s possible that you will receive a windfall from time to time in the form of a bonus, promotion, etc. So, when you find yourself with some extra money, you can use it to make prepayments on your loan or foreclose it. That’s one option. But consider the loan foreclosure and prepayment costs before you decide to do this. Another thing to keep in mind here is the loss of tax benefits that come with an Education Loan. You are eligible for tax benefits on the interest you pay towards your Education Loan. Making prepayments or foreclosing your loan means giving up this benefit. Trust us, foreclosing a loan may sound good but sometimes it’s not worth its value considering the loss of tax benefits. Hence, weigh the two options carefully before you excitedly use up your bonus money to foreclose your loan. The pinch of missing out on tax benefits could be harsher-than-expected.
The second option is to invest your excess money in an investment plan. But before you do that, take a look at your emergency fund? Do you have one? Yes, you need to build an emergency fund before you start making investments. In the case of a mishap, like the loss of a job, an emergency fund will tide you over till you find another.
We’ll reiterate our point again – first pay your Education Loan, use excess funds to set up an emergency fund, and then look at increasing your quantum of investment.
With your loan repayment and emergency fund covered, it’s time to look at your investments. We don’t advise that you completely steer clear of making investments while repaying your Education Loan. What we are saying is that you should prioritise your allocation of funds. What do we mean by this? Well, when you start repaying your loan, make sure you always have funds to make repayments. Don’t make big investments that strain your liquidity so much that you’re barely able to scrape together your EMIs every month. However, once your loan is drawing to a close and you only have a few more EMIs to meet, you can up the investment amount.
It’s all about striking a balance, you see!
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