Is prepaying education loan the right decision? | Your Daily Update ...

Joseph?s decision to prepay her student loan should be based on factors that determine the best use of her income. If her financial well-being is going to be enhanced by paying off the loan, then she should consider it. For this, she needs to evaluate the relative merits of the uses to which her current income can be put.

Joseph must understand that student loan is a low-cost debt and she can also claim the interest paid on the loan as deduction from her taxable income. Given these benefits, it makes more sense to service this loan through its term according to the repayment schedule rather than prepay it at this stage. Instead, Joseph should use her excess income to build security for her financial situation. She should create an emergency fund on a priority so that she can use it if her income falls short at any time. She should assess the amount she can save every month and use it to create a corpus that she can use for other large purchases, such as a car, that she is considering. This is likely to be funded by a high-cost loan, and if she manages to save money, it will help her reduce the loan that she will have to take.

Apart from her immediate needs, Joseph should also start saving for her long-term goals as her income improves. Joseph should be careful about not doing anything that will negatively impact her credit profile. She should make sure that she has sufficient funds for her student loan and EMI repayments, as well as to meet her credit card bills in full. A bad credit score will make it difficult for her to get loans on good terms when she needs them for bigger purchases. A properly serviced student loan, on the other hand, will help her build a history of good repayment, which will lead to a good credit profile and score.

Source:http://economictimes.indiatimes.com/personal-finance/loan-centre/personal-loans/analysis/is-prepaying-education-loan-the-right-decision/articleshow/16503118.cms

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