An Education Loan can open the doors to a great career for you. But once you start working and the EMIs kick in, it often feels a burden that you want to get rid of. And rightly so, Education Loan interest range from 7.5% to 10% p.a. in India and if you have taken a loan of ₹25 Lakhs for a period of 15 Years, the amount of interest that you end up paying is ₹20.64 Lakhs which is as close as the amount of the original loan that you took. Sounds shocking right? That’s what happens when compounding works against you.
But what if we told you that you can recover your interest paid on education loan by simply investing 20% of your EMI amount every month even before you pay your final EMI? Sounds too good to be true, right? Let us break down this hack for you.
Understanding the Problem
Education Loan interest rates generally range between 7.5% to 11% in India. The maximum loan tenure for education loan is for 15 years but lenders usually keep the repayment tenure around 7 – 10 years. Over a period of 10 years, the interest amount can add up to a significant amount. This can take up the total amount repaid over the loan tenure as high as twice the amount that you had borrowed as we just saw in an earlier example. And truth be told, nobody likes to pay interest. So, how do you get it back?
The Education Loan Hack – Let your Small Amount pay your Big Interest Amount
Here’s the hack: When you start paying your EMIs, also start a SIP in an equity mutual fund. You don’t have to match the EMI amount – just 20% of your original EMI amount. By doing this, you would recover your full interest amount, that too before your final EMI. Think the SIP Amount as an addition to your EMI amount.
Why equity mutual fund? Well, equity mutual funds offer you potential returns that will be higher than your education loan interest hence offering you a positive return margin, thereby reducing your required SIP amount to recover your interest. Let’s take a look at few examples:
| Particulars | Scenario 1 | Scenario 2 | Scenario 3 |
|---|---|---|---|
| Loan Amount | ₹ 2,500,000 | ₹ 3,000,000 | ₹ 4,000,000 |
| Loan Tenure (in months) | 72 | 84 | 96 |
| Interest Rate | 10% | 10% | 10% |
| EMI Amount | ₹ 46,315 | ₹ 49,804 | ₹ 60,697 |
| Total Interest Amount | ₹ 8,34,651 | ₹ 11,83,498 | ₹ 18,26,879 |
| Returns Assumed | 12% | 12% | 12% |
| SIP as % of EMI | 20% | 20% | 20% |
| SIP Amount | ₹ 9,300 | ₹ 10,000 | ₹ 12,100 |
| Interest Amount Recovered (in months) | 65 | 79 | 93 |
Source: EduFund Internal Research
As you can observe through these examples, you need to start a SIP that is 20% of your actual EMI amount to recover your full interest. Also notice, how the Interest amount is recovered even before you pay your Final EMI. Sounds interesting, right?
Why it Works: Compounding
When compounding is working against you, the interest amount you pay over the years end up being equal to the original loan borrowed. Through this hack, you let the magic of compounding work for you, building wealth over the years, matching your interest outgo with small contributions. And because the funds chosen for investment are Equity Funds, the returns you earn on them (10-12%) eventually outpaces the interest that you pay on your Education Loan (7-10%).
We have prepared a chart for Scenario 1 to show you how your SIP eventually catches up to the total Interest value. Notice how Interest Value begin accumulating rapidly initially and then eventually slows down as you keep repaying. On the other hand, your SIP begins small, slowly accumulates initially and with time, it increases substantially and catches up with time. If you keep investing till your EMI ends, you can also accumulate an amount that is larger than your interest on your Education Loan.
Source: EduFund Internal Research
Tax Benefits – Bonus Hack
The interest paid towards Education Loan is allowed as a Tax Deduction under Section 80E of the Income Tax Act under the old regime. You can claim this tax deduction for up to 8 years. While you can’t reduce your interest outflow, you can reduce your tax outflow to increase your net savings.
Closing Notes
Education Loan can prove to be a stepping stone towards a bright career. But the same stone should not act as a hindrance for your financial well-being. By applying this small hack, you can ensure your Education Loan turns out to be an asset for you and not a Liability.
Disclaimer:
The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security.
The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment.
The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
