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Education Loan Repayment Challenges: How to Overcome [Strategies That Work]

Illustration of loan repayment process, showing steps and options for repaying a loan

Education loan repayment can be a burden if you don’t plan it in a smart and learned way. You may be wondering about how to repay an education loan for studying abroad if its such a major liability. Very often, they ignore the fact that if there’s a little amount of contemplation and planning is done before selecting the loan, all these uncertainties can be put to rest easily.

For the repayment of education loan, you must understand the policies and several other aspects of education loan repayment. Read on to get thorough know-how of protocols and tactics to plan your education loan repayment process in an effective way.

When Does The Education Loan Repayment Start?

Once students are aware of the number of EMIs they need to pay for their education loan repayment, the next question that crosses a student’s mind is if they need to repay while studying. To plan their loan repayment the right way, they must know the different repayment options.

Students who take an education loan are designated to a moratorium period. Ideally, during this period, the student does not need to make any loan repayment. This is the time between the end of the course and the start of a job, and RBI has asked banks to provide a moratorium period of one year after the completion of the course. A moratorium period acts as a financial cushion for students and gives them time to find work after completing their course. Your student loan repayment start date will be right after the moratorium period ends.

Education Loan Repayment Calculations

It is important to calculate student loan repayment (EMIs) for applicants, both before and after obtaining the loan. To make accurate calculations, it is essential for applicants to have complete information about education loan interest rates and processing charges. You can then make use of or EMI Calculators or student loan repayment calculators.

  • Accessing the education loan estimation service provided by the Indian Banking Association (IBA) can be done through the following steps:
  • Visit the official website of the Indian Banking Association (IBA.org.in).
  • Navigate to the ‘Others’ tab in the menu on the homepage.
  • Click on ‘Calculators’ in the dropdown menu.
  • To determine the EMI amount for student loan repayment, select ‘How much do I have to pay’.

To calculate the number of EMIs required for education loan repayment, choose ‘How long will it take to repay’.

EMI Calculator

Calculate your Education Loan EMIs

%

Loan EMI

Total Interest Payable

Total Payment
(Principal + Interest)

Student Loan Repayment Period

There are many student loan repayment periods depending on the type of financial institution you have taken loan from and your loan amount. Here’s what you need to know: 

Federal loans: Repayment periods for federal loans in the US vary based on the chosen repayment plan. Standard repayment is fixed at 10 years, but options like income-driven plans can stretch the period to 20-25 years depending on income.

Private loans: Private lenders offer much wider variability in repayment terms. Periods can range from 5 to 20 years, and some lenders even offer longer extensions.

NBFC loans (India): Repayment periods for NBFC loans in India typically fall within 7-15 years, including the moratorium period after studies.

Education Loan Repayment Methods

Now that you have determined the number of EMIs required to repay your education loan, it is crucial to understand the various methods and modes of payment available to you. Many students are unaware of early payment options, which often result in extended repayment tenures with high-interest rates. Here is a comprehensive list of education loan repayment methods:

Education Loan EMI:

The most common and organised method of repayment is through EMIs (Easy Monthly Installments). EMIs consist of fixed amounts decided at the time of loan disbursement, which students pay on a monthly basis. The EMI includes both the student loan interest and a portion of the principal loan amount. By paying higher EMIs, a larger portion goes towards reducing the principal amount, resulting in faster loan repayment.

Education Loan Part-Payment:

Students have the option to make lump-sum payments at regular intervals, in addition to the EMIs, to expedite the repayment process and reduce the total interest liability. Some banks may charge a processing fee for part payments, and there may be limits on the maximum amount allowed for part payment. It is advisable to consider part-payment only if you have a consolidated amount that is significantly higher than your monthly EMI.

Education Loan Pre-payment Or Foreclosure:

Students who have the opportunity to repay the entire loan amount at once can opt for education loan pre-payment or foreclosure. While most banks are obligated to offer this service, some may still charge a processing fee. Repaying the loan in full eliminates the monthly interest payments and reduces the overall cost of the loan. A loan stretched over a long period accrues more EMIs, resulting in higher interest payments. Pre-paying the loan with a nominal processing fee is often a better choice compared to paying a large amount of interest over an extended period.

Different Education Loan Repayment Plans

You can pay your education loan with flexible repayment plans provided by the banks. These loans let you pay as you earn. This  includes the following: 

Standard Repayment Plan: This is the default repayment plan for federal student loans. It involves fixed monthly payments over a 10-year period.

Graduated Repayment Plan: Payments start lower and then increase, typically every two years. This plan is suitable for borrowers who expect their income to rise over time.

Income-Driven Repayment Plans: Plans like Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) base monthly payments on your income and family size. They can be suitable if you have a lower income or high debt relative to your income.

Extended Repayment Plan: This plan allows you to extend the repayment period beyond the standard 10 years, reducing monthly payments but increasing the total interest paid over the life of the loan.

Consolidation: Loan consolidation combines multiple federal student loans into a single loan, often with a fixed interest rate. It can simplify repayment, but it may not necessarily lower your interest rate.

Refinancing: Refinancing involves taking out a new loan with a private lender to pay off your existing student loans. This can result in a new interest rate and repayment terms. Private loans, however, may not offer the same borrower protections as federal loans.

Switching Between Income-Driven Plans: If you are already on an income-driven repayment plan and your financial situation changes, you can switch to a different income-driven plan that better suits your current circumstances.

Switching repayment plans for federal student loans, you generally need to contact your loan servicer. They can provide information about available options and guide you through the process. Keep in mind that switching repayment plans can have implications for the total amount repaid and the length of the repayment period.

Education Loan Repayment Modes

Repaying a study loan offers multiple modes of payment, with each bank supporting various options. However, certain loans, such as education loans for studying abroad, may have specific payment requirements. Having a clear understanding of student loan repayment modes can greatly benefit applicants. Here is a comprehensive overview of

education loan repayment modes:

Repay Education Loan By Cheque/DD (Demand Draft Repayment)

Almost all banks accept student loan repayments through cheques, and some even allow the assignment of post-dated cheques (PDCs) for dedicated EMI amounts. PDCs are pre-signed cheques that are submitted to the bank and utilised only when the EMI is due. While cheque repayment is widely available, not all banks allow loan repayment through demand drafts due to security concerns. However, it is advisable to inquire about the demand draft option for student loan repayment.

Education Loan Repayment By Cash

Banks accept student loan EMIs in cash, and applicants and co-applicants can repay EMIs either by visiting the branch or requesting a home collection service. Cash repayment at the branch does not incur any extra fees, but there is a standard service fee for cash collection.

Automated EMI payments (ECS/NACH) Of Student Loans

Electronic Clearance Services (ECS) or National Automated Clearing House (NACH) are modes of automated loan EMI repayment. Applicants who prefer to repay their education loan from their savings account within the same bank or another bank can opt for this service.

They need to provide a verified and signed NACH mandate, which authorises the loan provider (bank authority) to request and receive automated payments from the savings account on the due date of each month. This service offers convenience, allowing applicants to pause payments or stop the service as needed. However, defaulting on automated EMI payments may result in penalty charges. In such cases, students need to visit the bank to resume the service and make payments for the missed EMI. Nevertheless, automated EMI payments are generally more convenient compared to other modes that require physical intervention.

Education Loan Repayment In NBFCs

NBFCs (Non-Banking Financial Companies) offer education loans with slightly different repayment methods compared to banks. Here’s a breakdown of the student loan repayment plan:

Moratorium Period: Similar to banks, NBFCs provide a moratorium period after your study is complete. This allows you time to find a job and stabilise financially before starting repayments.

Moratorium length: Typically, the course duration + 6 months to 12 months.

Payment during moratorium: Unlike banks which offer zero-payment moratorium, NBFCs require some form of payment, like- 

  • Simple interest: Interest calculated on the principal loan amount.
  • Partial interest: Pay a portion of the accrued interest.
  • Immediate EMIs: Start full EMI payments right away (less common).
  • Repayment Tenure: Total loan tenure is typically up to 15 years, including the moratorium period. Some NBFCs offer flexible repayment options based on your financial situation.

Interest Rates: NBFCs generally have higher interest rates compared to banks, ranging from 10% to 15% or even higher. However, they may offer lower rates for specific courses or universities.

Prepayment and Foreclosure: Most NBFCs allow prepayment and foreclosure without penalty charges, allowing you to pay off the loan faster and save on interest.

How Can Planning Repayment Of Education Loan Help Students Save Big?

Planning your loan repayment properly can not only help students lower their financial burden in a formulated way but can also help to save big. And this planning can begin quite early, as soon as the loan is disbursed. Let’s take a look at ways in which students can lower their education loan burden while studying.

  1. Getting a Part-time Job Such as Assistantship

 Working part-time during your education not only helps you with your living expenses but you will also be able to save some amount that can be used to repay the education loan.

  1. Get an Internship During the Summer Break 

Study abroad Students are allowed to do internships during their summer break. This not only helps them get the applicable industry experience but also helps them earn between $3000 to $ 5000 that can again be used to pay a part of the education loan.

We also advise students to build a budget and stick to it. Removing luxuries and needless spending and saving every penny should be a goal. This not only helps you save money but also get used to a lifestyle that is not extravagant. This will be helpful when you start earning and have money to spend but are wise enough to stick to your budget.

What Happens If You Never Pay Your Student Loans?

The consequences of education loan default whether from an NBFC or a bank, can be severe and long-lasting. Here’s a breakdown of what you can expect:

  • Delinquency and default: After 90 days of missed payments, your loan enters delinquency and is reported to credit bureaus, damaging your credit score. After 270 days, it goes into default.
  • Higher interest and fees: Late fees and accrued interest will snowball, significantly increasing your total debt.
  • Collections: The lender may sell your debt to a collection agency, which will aggressively pursue repayment via phone calls, letters, and legal action.
  • Wage garnishment: In some cases, the court may order your employer to withhold a portion of your wages to repay the debt.
  • Tax refund seizure: The government may intercept your tax refund and apply it to your loan balance.
  • Limited access to future credit: A bad credit score due to student loan delinquency will make it difficult to qualify for other loans, credit cards, mortgages, and even certain jobs.

Defaulting education loan can’t help you in any way, rather it can bring more financial downfalls. Its better to pay your loan on time for  improvement in your credit score.

Education Loan Repayment Tips

Repaying education loans can be a significant financial responsibility, but with proper planning and management, borrowers can navigate the process successfully. Here are some tips for education loan repayment:

Understand Your Loan Terms: Familiarise yourself with all the terms of your loan, including interest rates, repayment period, and any grace periods. Knowing these details will help you plan your finances effectively.

Create a Budget: Develop a realistic budget that includes your monthly loan payments. Ensure that you allocate enough funds to cover your living expenses while also making timely loan payments.

Explore Repayment Plans: Investigate different repayment plans offered by your lender, such as standard repayment, extended repayment, or income-driven repayment plans. Choose the plan that aligns best with your financial situation.

Opt for Auto-Debit Payments: Enroll in automatic debit payments if your lender offers this option. This ensures that your payments are made on time, reducing the risk of late fees and helping you stay disciplined with your repayment.

Prioritise High-Interest Loans: If you have multiple education loans, consider prioritising repayment of the loans with the highest interest rates. This can save you money in the long run.

Make Extra Payments: Whenever possible, make additional payments towards your principal amount. This can help you pay off the loan faster and reduce the total interest paid over the life of the loan.

Take Advantage of Grace Periods: If your loan has a grace period before repayment begins, use this time to get financially organised. Consider making voluntary interest payments during this period if you can afford it.

Explore Loan Forgiveness Programs: Investigate whether you qualify for any loan forgiveness programs. Some programs are available for individuals working in specific professions or sectors, such as public service.

What Are The Pitfalls Of Using A Longer Repayment Loan Tenure Extension?

Now that you are aware of how you can efficiently plan your interest amount repayment, let’s look at the pitfalls of using a longer repayment tenure. The additional interest that a student needs to pay when the loan tenure is extended is the biggest harm of such an extension. This additional interest puts a needless financial burden on the student. We advise you to stay away from this.

How Does Refinancing Help You?

As stated above, student loan refinance is much better than opting for a longer repayment tenure. This is because the student can negotiate for a lower rate of interest once they get a job and save their hard-earned money. An unsecured loan at 13% can simply reduce to 11.5% once the student gets a job. The lower rate of interest will reduce their EMIs and thus make education loan repayment a bit easier. 

FAQs

1. What is the rule for repayment of an education loan?

For Student and Scholar Loan Schemes, the repayment of EMIs commences either 12 months after the completion of the course or 6 months after obtaining employment, whichever occurs earlier.

2. What happens if an education loan is not repaid?

In case of non-payment of your education loan in India, the lender will initiate the process of sending notices to both you and your guarantor. Failure to respond to these notifications will result in loan default, leading to a significant negative impact on your credit score.

3. Is it good to pay off an education loan early?

Given the extended tenure of education loans, which can stretch up to 15 years, the accumulated interest liability can surpass expectations. However, it is possible to minimise interest payments by opting for early loan repayment. While paying off education loans ahead of schedule may present challenges, with careful planning, it can be accomplished.

4. What is the limitation of loan repayment?

The statute of limitations for debt recovery is set at three years from the date of lending the money. If there are no disputes concerning the lent amount within this three-year period, the statute of limitations expires. Consequently, the court has the authority to reject the case and may decline to hear it.

5. What is the legal action against education loan defaulters in India?

Under Section 138 of the Negotiable Instruments Act of 1881, if a loan remains unpaid for a duration exceeding 180 days, the lender is permitted to initiate legal proceedings against the borrower by filing a case.

6. How do I know what repayment plan I am eligible for?

To determine your eligible student loan repayment plan, contact your loan servicer to understand the intricacies of the plan and choose the one that suits your financial capability and condition. 

7. Can I change my loan repayment plan anytime?

Yes, for federal student loans, you can generally change your repayment plan at any time by contacting your loan servicer. However, private student loans may have different terms and conditions.

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Illustration of loan repayment process, showing steps and options for repaying a loan

Education Loan Repayment Challenges: How to Overcome [Strategies That Work]

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