Hi Sreekanth.
I am going to take an education loan of 18 lacs for my MBA course. I plan to start SIPs as soon as I start earning. Should I try to pay back the loan in a short duration (7 years - approx EMI 29000 @ 8.65 RoI) or should I pay it back for a longer duration (15 years - approx EMI 18000 @ 8.65 RoI) and invest the extra amount in mutual funds? Needless to say that I will have less to invest in mutual funds if I go with the former option.. However, in the latter option, the total interest that I'm paying the bank is higher (8 lacs higher). I'm very confused.
Please help. Thank you.
1 Answers
Hi,
Let's say you opt for second option ie Education loan for 15 years, then you can invest Rs 11,000 in mutual funds for 15 years. Assuming the expected returns @ 10% pa, the accumulation can be around Rs 45 lakh.
But do note that returns on mutual funds are not guaranteed.
You can also claim tax deduction on interest payments u/s 80E. The deduction for the interest on loan starts from the year in which you start repaying the loan. It is available for 8 years starting from the year in which you start repaying the loan or until the interest is fully repaid whichever is earlier. It means if entire payments are done in 5 years only, then tax deduction will be allowed for 5 years and not 8 years.
It should also be noted that if your loan tenure exceeds 8 years, then you cannot claim a deduction for the interest paid beyond 8 years.
Suggest you to initially opt for 15 year loan, start investing in mutual funds and also pay EMIs once you get job. Based on your financial position after 7-8 years, suggest you to take a call to prepay (partially or fully) your education loan.
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