Education loans have become a significant source of funding for overseas education, especially for students with high academic goals. However, students struggle while repaying the loans, adding a financial burden to families as well. It is even more challenging if the student cannot secure a high-paying job.

A proper financial plan can help students avoid complexities during the repayment of an Education Loan. One such financial plan would be investing in SIPs (Systematic Investment Plan). SIPs can be used to repay the Education Loans. It could be one of the efficient strategies to follow during repayment of Education Loans.

In this blog, we will uncover what SIPs are and how investing in SIPs can help repay Education Loans strategically.

What are SIPs? (Systematic Investment Plans)

Systematic Investment Plans are a method of investing in mutual funds or in any investing scheme, usually in small fixed amounts at regular intervals, typically monthly or quarterly. It is one of the disciplined financial habits that help you build a lump sum amount over time.

  • The standard minimum investment range for an SIP in India starts from 500rs, while some mutual funds may even allow as low as 100rs. There is no maximum or upper limit to investing in SIPs.
  • Individuals have to research and explore the best fit that suits their investment plans.
  • A student can make an early repayment of the Education Loan using SIPs.

How do SIPs work?

  • Choose a mutual fund or investment scheme that aligns with your investment plans and decide a fixed amount that you can invest in regular intervals, typically monthly or quarterly.
  • Once you've set up your SIP, the amount will be automatically deducted from your bank account at the specified regular intervals.
  • That deducted amount is used to purchase some units of the selected mutual fund or investment scheme.
  • The number of units you purchase will depend on the net asset value of the mutual fund on that particular day.
  • As the rupee rate fluctuates, so does the NAV value; therefore, you can buy more units when the NAV is low and fewer units when the NAV  is high.
  • It is the choice of the investor to receive the returns at the end of the tenure or at a periodic interval.

However, it is an undeniable fact that the investment in mutual funds and SIPs is subject to market risks.

Can you use SIP to repay your student loan?

  • Yes, a student can use a SIP to repay a student loan.
  • SIPs are smaller investments at regular intervals of time, which can grow significantly over time due to the advantages of compounding.
  • SIP helps you close the loan earlier than the loan tenure, which helps reduce the principal amount on which the interest is calculated, along with interest.
  • SIP instils financial discipline, encourages regular savings and investment, which helps in achieving your financial goals.
  • The earlier the Parents start investing in the SIP. The more time you get your investment to grow and compound.

How to use SIP to repay  the loan

For example, Rajesh borrowed an education loan of ₹30 lakhs for 15 years at a rate of interest of 10% per annum. His EMI amounted to ₹32,237 a month. EMIs for 15 years (180 months) seemed too heavy a burden, so he searched for a means to lighten the load.

To do this, Rajesh began investing in a Systematic Investment Plan (SIP) during his EMI payments. He invested ₹5,644 every month in an SIP of a mutual fund, around 17.5% of his EMI, hoping for an average return of 12% per annum.

For the next 11 years (132 months), Rajesh remained true to his SIP, and the investment accumulated to around ₹15.5 lakhs. Here, he utilised the SIP corpus so far to prepay the outstanding education loan, shutting down the loan four years ahead of schedule.

In doing so, Rajesh saved 48 EMIs, totalling ₹15.47 lakhs in payment.

However, with some lenders, pre-closing a student loan does not require any charges to be paid. So students can repay the education loan much earlier than the scheduled loan tenure.

Tips to enhance the benefits of SIPs

  • Start Early: If you choose to invest in SIPs, start early so that you can benefit from the long-term growth power of compounding
  • Choose the Right Investment Plan: Choosing the right SIP is important while planning to invest. Calculate your monthly income, expenses, and monthly EMI. Then decide how much you can comfortably invest in SIP
  • Track your SIP: monitor your investment regularly and make necessary adjustments to your portfolio if required.
  • Seek Professional Advice: Consult a financial advisor and seek guidance to get a personalized plan that matches your financial goals.

Conclusion

Repaying education loans can be both overwhelming and challenging. In this blog, we have covered how SIP can be used to repay the education loan, what an SIP is, and how it works. We have also discussed some tips on how to use sips effectively. However, it is important to understand that investing in SIPS and mutual funds is subject to market risks, and going through the respective terms and conditions is advisable.