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 loans 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 ?

  • On 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-applicants 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 you’re self-funding and your father is sending you 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. 

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 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 savings you can do after you have taken an education loan. 

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 

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.

Repay early with a clear understanding of pre-closure and part-payment

You need to have an understanding of the 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. 

You can watch this video where our co-founder Damini Mahajan explains about this topic in detail 

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.

FAQ

1. How can I save money on education loans after they've been sanctioned?
Post-sanction financial planning can help you save on education loans. First, use the tax benefits available under Section 80E where the interest part of your EMI is 100% tax deductible, and reduce your taxable income. TCS (Tax Collection at Source) on foreign remittances further means loan-funded students pay just 0.5% tax on amounts more than ₹7 lakhs, compared to 5% for self-funded students. The co-applicant can claim this TCS amount as a tax adjustment. In addition, moving your loan to another lender that offers a reduced interest rate can cut into the total amount of interest you pay on your loan. Upon early repayment, part payment and pre-closure reduce interest paid over time since it reduces the principal amount at an earlier time, that is, it shortens the repayment period. Finally, you may invest some time in searching online tools, say, calculators, to enhance your grasp of and enhance your loan repayment savings. These combined approaches provide maximum financial relief during and after your education loan tenure.

2. What is TCS on foreign remittance and how can it help students with education loans?
Introduced in FY 2021, Tax Collection at Source (TCS) on foreign remittance is a tax policy when the foreign remittance is above ₹7 lakhs in a financial year. If students are self-funding, a 5% tax is applied to the excess amount. However, students with education loans through recognized financial institutions are eligible for a reduced rate of 0.5% TCS. Suppose you remit ₹20 lakhs, then ₹6,500 will be deducted as TCS instead of ₹65,000 while you’re a self-funded student. This policy gives loan-funded students great relief from the financial burden. Additionally, this TCS can be claimed back by an applicant ( generally a parent ) as a tax adjustment to his or her tax liability. This reduced rate allows students and their families to take advantage of the reduced rate and reclaim the amount during annual tax filing in order to attain significant savings while Students abroad.

3. Can I claim the TCS amount back if my parent is sending money abroad for my education?
If your parent is sending money abroad for your education, yes you can claim back the TCS (Tax Collection at Source) amount. Parents can even adjust the TCS paid against their annual tax liability if they add their names as co-applicants for your education loan. Let’s say your parent sends ₹20 lakhs abroad and pays ₹65,000 as TCS (5% on ₹13 lakhs which exceeds the threshold of ₹7 lakh), this can be used to reduce the tax that is payable from your parent while filing income tax return. Say if their usual tax liability is ₹1 lakh per annum, the TCS adjustment will be ₹35,000. A feature of refundability makes TCS more manageable for the families spending from the overseas education funding as the amount paid does not become an additional expense. This tax credit adjustment simplifies the financial burden and it is essential for families to understand and use this benefit effectively during the loan tenure.

4. How does transferring my education loan to a lower interest rate help save money?
Frequently, you can reduce the cost of repayment of your education loan by transferring it to a lender who offers a lower interest rate. The amount of EMI and total amount paid during the tenure of the loan depend directly on the interest rates. Transferring your loan to a lender with better terms means you get to pay less in the interest part of your EMI, allowing you to pay a greater part of the principal. Let’s take an example. If your outstanding is ₹40 lakhs and your interest rate is 10%, you can save lakhs over the repayment period by moving to a lender who offers 8%. The outstanding principal is calculated using interest on a monthly basis so, by shortening the rate shortens the loan duration and total payable interest. In addition, only the remaining loan balance and not interest paid can be transferred, and interest paid is not repaid. It particularly helps during the early stages of repayment.

5. Do I need to pay interest again when transferring my education loan to another lender?
You don’t have to pay any interest again when you transfer your education loan to another lender. Loan transfer is the process whereby the new lender takes over the remaining balance of your loan from your previous lender. Recalculated or duplicated interest paid on the original loan. The new lender starts with the outstanding principal and charges future interest based on their rate and terms. For example, let’s say you have an outstanding balance of ₹40 lakhs, if you transfer it to a lender who offers you a lower interest rate, the calculation will start from the new rate of ₹40 lakhs. It eliminates the false impression that interest previously paid must be paid again. The most effective of all are loan transfers as they help reduce the long-term financial burden by lower interest rates to lower EMIs and faster principal repayment resulting in higher savings.

6. What is the difference between part-payment and pre-closure of an education loan?
Part-payment and pre-closure differ in the extent of repayment. Part-payment is paying a significant chunk of the loan principal but the usual EMIs are to be paid. This reduces future interest calculations as well as the repayment tenure. An example will be, on a ₹40 lakh loan, a ₹5 lakh part payment will make the principal ₹35 lakhs, instantly reducing the interest obligations.

On the other hand, pre-closure means paying the whole amount that is outstanding till the term ends and completely closing the loan. Pre-closure takes away the loan burden completely, while part payment reduces it step-by-step. Policies differ between lenders: Government banks don’t usually put a lock-in period of 6 months, while NBFCs and private banks often have a 6-month lock-in period. The advantage of both options is that they will reduce the costs you pay over time, and can also save you more money in the early part of the loan by letting you pay it off sooner.

7. How can part-payment help reduce the burden of my education loan?
This reduces part of the financial burden of an education loan amount, which in turn shortens the repayment period, and directly lowers future interest payments by decreasing the principal amount. Let’s take a look at the reverse of this, for instance: say you owe ₹40 lakhs but pay ₹5 lakhs as a part payment, your principal will now be ₹35 lakhs. This means that the EMI becomes smaller, or in other words, the loan closes faster as interest is calculated on the principal. Part-payments also enable borrowers to pay down their debt incrementally, without the need for a lump sum to make a full pre-closure. For instance, many NBFCs and private banks demand a 6 month lock-in period before permitting part payments, with minimal documentation fees. Instead, there is more flexibility from government banks, you can make part payments at any time. With bonuses, savings, or unexpected income, part payment early in the loan cycle can make for big long-term savings by minimizing the overall interest paid over the loan tenure.

8. Is it possible to save money on education loans by repaying early?
So yes, paying off an education loan early has the potential to save you huge amounts when it comes to total interest paid over the loan tenure. Part repayments or pre-closure are early repayment strategies. The sooner you reduce the principal amount the lesser the interest computed on the remaining balance and more of your EMI can go towards the principal. For instance, pre-closing a ₹40 lakh loan 3 to 4 years early will save lakhs of rupees in interest. Government banks tend to be more flexible than NBFCs and private banks and impose a 6-month lock-in period for early repayment. Students can pay with joining bonuses, salary increments, or savings for early repayment. By planning early repayment strategies, you not only eliminate financial stress but also increase the likelihood of closing the loan faster and free up future cash flow to be applied toward other financial goals. Optimizing savings and lowering the ultimate cost of borrowing is done through early repayment.