Should you pay off a loan early or start investing?

Vansh Ahuja completed his MBA from a premier institute and landed a job with a multinational retail company. He wants to realize his dreams of raising his standard of living, but is stuck by an education loan of Rs.30 lakh, which he has to pay off in ten years. He has received a joining bonus of Rs.4.5 lakh. He has been told that the 20s is the best time to start investing and he would like to invest the amount. However, he faces a dilemma. Should he start saving for his future or should he pay off part of his student debt early with the money?

It is essential for Vansh Ahuja to keep up with his student loan payments and ensure that he meets at least the monthly minimum to maintain a good credit history so that he can qualify for a loan in the future. By automating these EMI payments and treating them as mandatory charges, he can stay consistent.

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

Once an emergency fund is in place, he can consider paying off the loan early. He should start by understanding the lender’s prepayment standards, especially any penalties. It is also important to note that under the old tax regime, the interest paid on an education loan qualifies for a deduction under Section 80E of the Income Tax Act, a benefit he would lose if he opts for prepayment.

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

If the calculations anticipate the early repayment of the loan, he should use this as an opportunity to reduce his debts.
Additionally, he can use his current single status to build savings and investments for future goals, as financial responsibilities will likely increase with age. By reducing debt now and developing healthy saving and investing habits, he will be well-positioned to handle his future financial pressures.

Content courtesy of Center for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.