Most people think taking an education loan with a lower rate of interest or a lower processing fee is enough to ensure long-term savings, which is true although it’s just a pre-phase, and why settle when you can save further.
There are a lot of elements that come into the picture after the loan is sanctioned like the disbursement of the education loan amount, education loan repayment process, TCS on foreign remittance, and Tax exemption on education loan under section 80E, and so on.
This article is specifically for those who want to save their money on education loans after the loan is sanctioned. So read on till the end to gain deeper insights on the subject. But before that, you can also watch the 17th episode of our LoanFlix Series which is on the same subject and thoroughly explained by Ms. Damini Mahajan. So do check out the video which is embedded below-
Tax collection at source (TCS) on foreign remittance
This is a new tax policy that was introduced in the financial year 2021 but was implemented only on 1st October 2020. As per TCS on foreign remittance policy, a person sending money more than 7 lakhs abroad in a financial year, has to pay an extra tax on amounts exceeding 7 lakhs. To provide relief to students who have taken education loans through a financial institution in India i.e banks or NBFCs, the rate of TCS shall only be 0.5% on amounts exceeding Rs 7 lakh.
For eg., if you’re sending 20 lakhs abroad in a year for your education-related expenses, the basic 7 lakhs is exempted from any tax and you have to pay tax on the remaining 13 lakhs. If you are self-funding your education abroad then you are liable to pay a tax of 5% on the amount exceeding 7 lakhs which will be in this case INR 65K. Students who have taken an education loan from financial institutions to fund their studies abroad are liable to pay a tax of just 0.5% which is just INR 6,500 in this case.
How to save money on student loans ?
Pertaining to our topic of how to save money on student loans, it is useful to know that the whole amount of the TCS can be adjusted in the annual tax liability of your father or mother if they are the co-applicant in your education loan, or if they are the one sending you the money abroad. This means the whole amount of TCS can be claimed back.
Getting back to the above example, say if you’re self-funding and your father is sending you the money abroad, in addition to the 13 lakhs that your father had to send you, he also has to pay the INR 65K as TCS. Now let us assume your father pays INR 1 lakh as income tax on his income every year, this year he can only pay INR 35K because the 65K of TCS can be adjusted in this tax.
For more in-depth calculations, you can also watch the dedicated video on Tax Collection at Source (TCS) on foreign remittance which is episode 04 of our LoanFlix series, season 2 on youtube.
Tax rebate on education loans under section 80E
As per section 80E, the entire interest component of your EMIs which you pay while repaying your student loan can be claimed back as a reduction in your Income-tax making your entire interest component of your EMIs tax-free.
For eg., say your father’s taxable income is 12 lakhs per annum and as he falls under the 30% tax payable index, he is liable to pay around 1.8 lakhs every year. Now assume adding your father as your co-applicant, you take an education loan of 40 lakhs for your MS of 2 years at an interest rate of 10%. At a 10% interest rate, you would be paying 4 lakhs as interest per year albeit it will reduce over years. So under section 80E, this 4 lakhs is tax-free meaning out of your father’s taxable income of 12 lakhs, this 4 lakhs can be reduced and his taxable income can be made only 8 lakhs making your father liable to pay only 80K as tax, which is a clear saving of 1 lakhs every year. So this is the saving you can do after you have taken an education loan.
There’s another dedicated video on section 80E which you can also watch as well, which is the 9th episode of the LoanFlix series.
We understand that the calculation of this whole interest and the savings while repaying your student loan can be a bit complex for some, which is why we’ve designed a calculator that will help you calculate the savings on section 80E based on your or your father’s income and parameters.
Transfer your loan for a lower rate of interest
So, this is not something many people think of even if they are aware of it, mostly because they do not want to go through the entire burdensome time-consuming loan process again while being abroad. But WeMakeScholars, an organization funded and supported by the Ministry of IT, Government of India, can make that easy for you and can get it done for you without you having to come to India. So do reach out to WeMakeScholars by requesting a callback.
To those who are not aware of the education loan transfer, you need to know that you can always transfer the outstanding loan amount of your education loan to another lender who is offering you a better interest rate.
There’s this misconception among students that whatever interest they have already paid to their first lender, they have to pay it again to the second lender if they transfer their education loan. So let me tell you, they are miles away from being correct as you do not have to pay the interest which you have already paid.
The outstanding amount of an education loan is considered as a fresh loan every month, so for eg, say you have a 40 lakhs outstanding education loan today and you pay INR 50K as your monthly EMIs every month. So what happens is out of this INR 50K, the first portion goes towards the monthly interest of your 40 lakhs, and the leftover portion is reduced from your principal amount. Now let's say out of this INR 50K, INR 30K went towards your interest, and the remaining INR 20K gets reduced from your principal amount. Now at the start of the next month, only INR 39,80,000 will be your principal amount and the interest will be calculated on the INR 39,80,000 only, and the same thing is repeated next month and so on.
This is how the whole cycle of education loan repayment works, so over time, month after month, your interest portion of the repayment gradually reduces, and the portion towards your principal increases, and eventually your principal reduces to zero.
So at any point in this whole cycle, when you transfer your education loan, the calculation in your new bank will start from your outstanding figure from that month and not from the start itself. So when you transfer your outstanding education loan to another bank that offers you a lower interest rate, your interest portion gets smaller and more portion goes towards your principal which helps you close your education loan faster which means you'll save more.
Finding these calculations difficult? WeMakeScholars is always here to help. We have helped thousands of students get their loans transferred to low-interest offering lenders and in turn saving them Lakhs of rupees. Get in touch with us and we’ll do the same for you! You can also choose to watch our full-fledged video on an education loan transfer for better clarity on the calculations, which is the 5th episode of the LoanFlix series, season 2.
Repay early with a clear understanding of pre-closure and part-payment
You need to have an understanding of part-payment and pre-closure policies of the lender from whom you're taking an education loan and having this knowledge beforehand will help you plan an early repayment which means the lesser interest paid to the bank the more savings you can do. Let us see how to save money on student loans through part-payment and pre-closure
- Part-payment - Part-payment means paying the bulk amount towards your education loan so that you can reduce your principal. NBFCs and private banks have this 6 months lock-in period from your first disbursement during which you can not do any part-payment. After 6 months you can do part-payment as many times as you want by paying the documentation charges of around 2K to 5K. Government banks on the other hand do not have any such lock-in period, you can do part-payment the next month from your first disbursement.
- Pre-closure - As the name suggests pre-closure means where you close your loan way before your repayment tenure. It is similar to part-payment but you pay the entire loan amount in one go before your repayment tenure. Again NBFCs and private banks have this 6 months lock-in period and you can not pre-close your education during this duration, but there is no such lock-in period in Government banks.
Initially, it would be tough to pre-close an education loan since the loan amount would be huge, but part payment could be an option during the initial years of a repayment cycle. For example, a lot of companies around the world offer joining bonuses which students can use for part-payment of their education loan. That would dramatically lessen the burden off students' shoulders in the later years.
So, these were a few tips on how you can save money after taking an education loan, which is to claim your TCS on foreign remittance, claim your tax exemption under section 80E, transfer your education loan to a lower interest rate if you're getting one during your repayment cycle, and do part-payment or pre-close your education loan as early as possible. You can approach WeMakeScholars for getting your education loan or if you are facing any issues transferring your education loan.