Are you making these 5 mistakes with Education Loans?

Student loans are a great option to finance your graduation or post-graduation degree rather than pay the entire fees out of your own pocket. However, there are some important dos and don’ts that come as unwritten rules while taking a student loan. For instance, there needs to be complete clarity regarding the repayment terms and repayment process.

Similarly, interest accrues on an Education Loan from the day the funds are disbursed into your account, and not from the day you start repaying the loan through equated monthly instalments (EMIs). As a student, it is important to know these details in advance so that you can make an informed decision.

Here are five common student loan mistakes that should be avoided at all costs if you wish to maintain a healthy loan status:

Ignoring the interest component

Most student loan repayments don’t start until after six months from the day you land a job or one year after course completion, whichever is earlier. However, the interest starts accruing from the day the funds reach your college. The interest accrues each day and is finally added to your principal loan amount. This situation amounts to a snowball effect, where you end up paying interest on unpaid interest. The ideal solution would be to start paying your interest due right from the moment it accrues or at least during your grace period in order to avoid an even bigger loan and greater payments once your actual repayments start off. 

Deferring the student loan

A grace period of six months is time enough for a graduate to hunt for a job of their liking and start working. If, for any reason, the student cannot find employment and pay off their student loan dues, the option of deferring the loan is available. But deferring a student loan is not a great idea as you will attract interest even during the deferment period, and you may have to pay heavy interest amounts out of your pocket. Imagine not having a job to pay for those EMIs, plus adding an unnecessary interest component to the loan!

Consolidating the student loan

The whole premise behind consolidating multiple outstanding loans in your portfolio is to centralise them and pay a single monthly EMI instead of keeping track of many different payments. Another reason could be to follow an income-driven repayment plan. However, one common mistake students make is believing that student loan consolidation will save them significant money. While this may ensure a smaller monthly payment, your interest rate on the loan remains unaffected. A weighted average calculation of multiple loans lands you the new interest rate. Your repayment tenure may stretch, but you end up paying more interest over time.

Missing a payment

Missing even a single instalment on your student loan debt repayment can have serious consequences. The loan will be considered delinquent right after the day you miss a monthly student loan payment until it is actually made. This can badly hurt your credit score and adversely affect your future borrowing capacity. After 90 days of missing a payment, your loan will be officially categorised as a non-performing asset (NPA), which can land you in serious trouble.

Making minimum loan repayment After graduation

Many students end up choosing the wrong way to spend their hard-earned salary, such as by purchasing a new home or a luxury car after spending the bare minimum on their education loan repayment. The intelligent alternative would be to allocate the extra funds towards your education loan repayments instead of nice-to-have luxuries. This will shorten the repayment tenure and save you from paying a huge amount as the interest component.

Conclusion

Make an effort to put in place a strong payment plan to fulfil your student loan terms and conditions to avoid wasting precious resources (your time and money). An IDFC FIRST Bank Education Loan can be a strong partner in accelerating your career by funding your education requirements. Contact IDFC FIRST Bank today and secure your future with a comprehensive student loan!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.