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Education loan and a story

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So you have cleared your high school/ junior college and now looking forward to joining a college for the undergraduate program. It might be a new city for you, living out of your hometown, far from friends and into a very competitive environment. Before you make the choice of institution, where you’ll be spending some of your bright and unforgettable time, you need to take a call if it’s affordable or not.

Premier non-govt. institution charges a hefty fee, similarly, there are a lot of private colleges available in tier 2 & 3 cities with affordable options as well. It all boils down to your father pocket and willingness to spend for the same. Some of you will manage from your own sources and some will look for scholarship or education loan. Let’s see education loan in real life scenario.

Akash is a bright student belonging from a modest background. His father is a local businessman and wants him to join the business as he completed his high school. But Akash wants to pursue engineering and explore the life of a student in a new city, so he told his dad about the same. Father didn’t argue much and gave the permission. Akash happily went to this new city of Pune and write the exam which college take to give admission. Next month he got the result and he cleared it with good marks, college administration sent him the detailed fees structure which is hard to understand even for a scholar J. Total fees were around 8 lakhs and to be paid in equal installment per semester.

So our bright boy went up to his father and told him that he got the admission and about the fees. Father congratulate him and offer full support in funding for his education. Although he insisted on taking an education loan (he sacrificed the free money for our blog 😉

He went to XYZ bank and asked the concerned person about education loan. The concerned person told him the procedure and documentation for applying the same. He got to know he can take a loan up to 7.5 lakh without any collateral, it needs to be secured with collateral. Also, he needs a co-applicant (father) to apply for the loan.

At last, he got collateral, co-applicant and submitted the required documentation. Bank sanctioned him 8 lakh loan, he may not need to pay anything until his course finished. Also known as moratorium period, the student gets some relief here as they don’t need to pay anything to the bank.  Condition the EMI will start from the completion of 1 year after finishing the course or 6 months after getting a job, whichever comes first.

Bank will disburse loan in parlance with semester fees, i.e. 1 lakh each for 8 semesters. Also, interest will be subjective to these payments. Simple interest will be charged till your course completed and 1-year moratorium period, so in total simple interest for 5 years. Kindly follow the table given below for better understanding of the same:

Disbursement   Amount Disbursed Interest Applied
Sem 1 100000 100000 6000
Sem 2 100000 200000 12000
Sem 3 100000 300000 18000
Sem 4 100000 400000 24000
Sem 5 100000 500000 30000
Sem 6 100000 600000 36000
Sem 7 100000 700000 42000
Sem 8 100000 800000 48000
Moratorium     96000
Total interest applied during study & repayment holiday     312000
Original Outstanding     800000
Total Outstanding     1112000

 

As you can see the outstanding amount after the 1 year of your graduation is 11.12 lakh, now EMI will be decided by this amount, which will come around 15954 for 10 years. A simple math calculation will tell you, 15954X10X12 = 19.14 lakh, is the amount you’ll paying during the overall tenure of EMI period.

Akash got a job after doing certification in big data, and he is getting a monthly salary of 30k, furthermore he decided to pay EMI as it is for 2 years and create a corpus for paying a chunk after 2 years. He invested 5000 p.m. in a liquid fund and @ 7% CAGR, he received 1.28 lakh, out of which 1 lakh he used for partly repaying the loan. Let’s see how Akash had planned his strategy of paying the loan as fast as possible…

Month Loan Outstanding Add. Payments EMI
Jul-16 1112000  
Aug-16   50000 15594
Continue      
Jun-18 987687.42 0 15594
July 881610 100000 15594
Continue      
Jun-20 698049 0 15594
Jul-20 439076 250000 15594
Continue      
Jun-22 141712 126118 15594

 

So Akash has done 3 pre-payments, first payment of 50k which he got as joining bonus, 2nd payment of 1 lakh which he accumulated from putting 5k per month for 2 years and 3rd payment of 2.5 lakh which he accumulated from putting 10k per month after getting a salary hike of 50% in July 2020. In similar fashion, he will make the last prepayment of around 1.26 lakh and his loan will be finished in June 2022.

So following a simple and smart strategy, he will complete his loan repayment in under 6 years. But the situation is not always the same for everyone, sometimes you’ll be in a position to pay more and sometimes you’ll find it hard to pay the EMI’s only. Do run your mind horses and see if it can be of any help. Thank you!!!

 

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