He should also consider setting up an emergency fund, which can act as a backup for EMI payments in case of an unexpected job loss

Should you prepay loan or start investing? If he doesnt already have one, he could consider allocating the Rs.4.5 lakh bonus for setting this up

Vansh Ahuja has completed his MBA from a premier institute and has bagged a job in a retail multinational company. He wants to accomplish his dreams of upgrading his standard of living, but is getting bogged down by a Rs.30 lakh education loan, which he is supposed to pay off over 10 years. He has received a joining bonus of Rs.4.5 lakh. He has been advised that the 20s are the best time to start investing and he would like to invest the amount. However, he faces a dilemma. Should he begin saving for his future or prepay a part of his student debt with the funds?

It’s essential for Vansh Ahuja to keep up with his student loan payments, ensuring that he meets at least the monthly minimum due to maintain a good credit history for future loan eligibility. Automating these EMI payments and treating them as a mandatory expense will help him stay consistent.

He should also consider setting up an emergency fund, which can act as a backup for EMI payments in case of an unexpected job loss. If he doesn’t already have one, he could consider allocating the Rs.4.5 lakh bonus for setting this up.

Once an emergency fund is in place, he can consider prepaying the loan. He should start by understanding the lender’s prepayment norms, particularly penalties, if any. It’s also important to note that under the old tax regime, the interest paid on an education loan is eligible for a deduction under Section 80E of the Income-tax Act, a benefit he would forfeit if he opts for prepayment.

Ahuja should weigh the impact of losing this tax benefit and any prepayment penalties against the potential savings in interest, comparing the old and new tax regimes before making a decision.

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If the calculations favour loan prepayment, he should use this as an opportunity to reduce his debt.
Additionally, he can leverage his current single status to build savings and investments for future goals, as financial responsibilities are likely to increase with age. By reducing debt now and inculcating healthy saving and investing habits, he will be well-positioned to manage his future financial pressures.

Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

This story originally appeared on: India Times - Author:Faqs of Insurances