Starting Your Career With Student Loans to Pay Back

Like Hemrajanai, many young professionals are increasingly funding their education through loans. Even though an education loan is considered a ‘good loan’ due to tax exemption and education is considered an investment in itself, starting your career with a large loan requires strong demand. Financial Planning From the start, experts say.

“The young working population is quite aspirational in the sense that they are not afraid of taking loans to fulfill their dreams. Unlike previous generations, they tend to have fewer liabilities early in their careers and instead of just earning and saving for future financial goals, they choose to take financial risks to follow what their parents have done. are ready to However, without a plan, starting out with a loan can have a long-term impact on the individual. making moneyRohit Shah, Founder and CEO, Getting You Rich said.

Financial planners recommend prioritizing loan repayments as the interest component eats into your earnings. “If a young professional starts out with a decent income package, it is prudent to consider a repayment strategy that can reduce the loan tenure. Many borrowers often opt for a longer tenure as the monthly installments become smaller. However, a shorter repayment tenure, even if the EMI is large, is advisable to repay the loan early,” said Praleen Bajpai, Founder, Finfix Research & Analytics.

This is exactly what Delhi’s Sanyam Trivedi is doing. About 40% of his monthly income goes to pay ₹He took a loan of 18.95 lakhs for his owner and he wants to increase this allocation to 55-60% of his income so that the loan can be repaid early.

Shah said the easiest and most efficient way to plan a debt repayment strategy is to target it. “Say, someone wants to pay off a 5-year loan in 3 years. Once you have set a goal, you can work backwards to figure out how you should set up the corpus. You want to use your annual bonus, how much do you need to save regularly, should you supplement your income if current earnings are not enough.”

When people create and stick to a repayment strategy, they automatically learn to budget and prioritize savings over spending.

Trivedi is an example. “I use the lump sum savings every three months to prepay for the loan. It helps in deducting my long-term dues,” Trivedi said.

It’s worth noting that the interest savings are higher in the early stages of the loan, so the sooner you repay, the lower your interest expense. Hemrajaniya made advance payment of ₹6 lakhs immediately after the commencement of loan repayment, thereby reducing the EMI liability ₹from 39,000 ₹25,000.

“I had a savings of approx. ₹3 lakhs from my previous online ventures, which were invested in the stock market for almost three years. In January, I liquidated my investments to repay a part of the loan so that it would be easier for me to pay the EMI.” Note the interest as a benefit that the interest paid on the education loan is tax deductible only. Available for eight years starting from the year in which repayment starts.

Loan repayment should not be done at the cost of investment. This is because starting early provides more investment opportunities as the investor has time. A Systematic Investment Plan (SIP) started today, say for 10 years, you are likely to get better returns in terms of rupee cost averaging, for five years starting five years from now.

According to Ankur Maheshwari, CEO, Equirus Wealth, a hybrid approach is the right way to repay an education loan and invest for the future. “Young professionals can have an aggressive portfolio with high allocation towards equities. It helps in two ways; One, the expected return from equity as an asset class is expected to exceed the rate of interest for education loans, typically over a longer period of seven to 10 years. Second, a late start in investing leads to a loss of profits earned from the power of compounding in subsequent years.”

Bajpai said the loan repayment and investment contribution will vary based on the loan amount, EMI, salary package, monthly household expenses and other liabilities. Despite this, at least 10-15% of the monthly income should be set aside as savings before spending it. “A good starting point is to budget; Listing of expenses to identify areas, especially discretionary spending, where spending can be curtailed,” Bajpai said.

The next step should be to create an emergency corpus that can cover your expenses and EMIs for at least eight months. “Once the budget is ready, it is necessary to start spending a part of your income to create a contingency fund,” she said.

Shah agreed and said, “Saving for contingencies is no longer an option. Especially in today’s job market, it is a must for people of all income and age groups.”

Next, though small, regular savings will come in handy for future goals. For example, Hemrajnai wants to buy a car and also wants to create a corpus to start his own venture. He plans to do both in the next four to five years but is only saving ₹15,000 per month without asset allocation plan. “I have only a small amount left to invest after all expenses. Fortunately, with the current work from home setting, I am able to save and invest. I invest directly in stocks and mutual funds.”

Bajpai suggested that he should first create an emergency fund, which would cover his loan EMIs if he left his job to start his business. “Till the time their education loan is not repaid, they should avoid increasing their debt burden by taking a car loan,” he added.

Trivedi, on the other hand, in the absence of any short- to medium-term goals, is siphoning off surplus income for retirement and creating a contingency fund through the national pension system.