education cost
How do I stay clear of student loans that are costly? What to know when it comes to planning, managing and paying off your student loans quicker. Image Credit: iStockphoto

Dubai: Planning a student loan and figuring out how to repay it can be as challenging as passing one’s exams with great grades.

When it comes to planning how one can repay an education loan, the process starts even before taking the loan. Planning it after completing your education can likely lead to financial constraints.

With college fees having steadily increased every year, you may have no option but to opt for student loans. But when it comes time to applying for one, do not assume that all student loans are the same.

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Benefits can vary by lender, and some lenders offer more repayment flexibility than others.

Taking an education loan to study in the UAE?
In the UAE, banks offer student loans anywhere between Dh10,000 and up to Dh150,000. However, the loan amount that is given out will depend on the parents or students' eligibility. The sanctioned loan amount should be repaid, usually by within 48 to 60 months.

The average tuition fees for an undergraduate program in the UAE ranges from Dh37,500 to Dh80,000 per year and for post-graduate programs it ranges from Dh55,000 to Dh95,000. An extra Dh1,200 per month should generally be included for general living expenses.

When it comes to education loans in the UAE, interest rates vary depending on the bank, but it ranges between 7 per cent and 9 per cent.

Unsure how to choose a student loan and lender? Here are some key factors to look for in a student loan:

• Repayment options

The repayment option is the way in which you are required to repay your loan. When it comes to choosing a student loan repayment, you choose between either making payments while you’re in school or postpone until you graduate.

Making in-school payments help reduce the overall cost of the loan as you start paying down interest sooner. Some lenders will give you more options than others. Most lenders offer different repayment options on undergraduate and graduate loans, so you can choose what works best for you.

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If you get a job after the completion of your studies, you will need to repay the ‘Equated Monthly Instalments’ (or EMIs) in case you have taken an education loan.

While you can pay off the loan early to reduce interest payments, paying off education loans before the scheduled close can be difficult. But if you plan your loan payment, you can do it.

Why should you repay education loans faster?
A loan payment takes out a significant portion of your monthly salary that can be utilised to achieve your financial goals. It hinders you from changing your job as then it will become hard for you to manage the payment.

Delay in repayments of education loans is a serious burden on the borrower and especially when your credit history is building at the start of the career.

Suppose, you borrow an education loan of Dh75,000 for 5 years at an interest rate of 9 per cent per year, the interest amount you will have to pay for it will be about Dh18,000.

However, if you choose a 4-year tenure, the total interest you will pay is Dh14,000. So, if you pay off the loan early you will be able to save up to Dh4,000. So choosing a relatively shorter loan term will help.
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• Repayment terms

The repayment term is the amount of time you will take to repay the loan. Paying the loan back sooner will result in a lower overall total cost, but it will also result in larger monthly payments.

Picking a longer loan term will help you manage your monthly payment, but the loan will be more expensive overall.

The terms offered by lenders vary, and many lenders assign you a term without giving you the choice. Several lenders allow you to choose the term that works best for you.

One of the obvious ways to pay off education loans early is to pay more. And, like indicated in the above example, you can do so by choosing a shorter repayment tenure or loan prepayment.

However, the EMI can be higher when choosing a shorter tenure. So, don’t cut short the loan tenure to a point that can make monthly payments hard to execute. Choose a relatively shorter loan tenure that can help you pay early and keep interest payments in check.

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You can also look for a loan transfer to get cheaper interest rates. Negotiate with your present bank for a lower interest rate, and if it doesn’t agree, use a balance transfer facility.

You might save a good portion of your interest amount when you choose a lender that offers you a low-interest rate on your education loan balance amount. To save more on interest payments, you can have the same EMI. This will cut short the tenure by some and help reduce your interest obligations.

Choosing the right student loan repayment term
Short-term repayment: Short student loan repayment terms are a fantastic option for borrowers with small student loans who can afford to make higher monthly payments. The benefit of short-term student loans is that they can significantly decrease the total amount of interest paid over time.

For example, a Dh15,000 loan with a 5-year term will have higher monthly payments than the same loan spread out over a longer term (if available), but it will incur less total interest because you’ll pay down the principal amount more quickly.

Long-term repayment: Long-term repayment plans, on the other hand, are perfect for students with large loans who need to decrease their monthly payments. While long-term plans incur more interest over time, they make monthly payments more affordable and easier to handle.

For example, if your Dh15,000 loan was spread out over 20 years, you’ll have much more time to pay down the main borrowed amount. While each payment will incur additional interest, opting for a long student loan repayment term will allow you to repay the loan in a way that fits your monthly budget.

It’s important to choose your student loan repayment term based on your budget and total loan amount. Selecting the right term will allow you to repay your loans as quickly and efficiently as possible.
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• Interest rates

The interest rate on a student loan is a percentage of the loan principal charged by the lender as part of your overall loan cost — essentially, it’s a fee you pay to borrow money.

There are two types of interest rates – fixed and variable – and most lenders offer both options. A fixed interest rate will stay the same throughout the life of the loan, while a variable interest rate can fluctuate depending on the market conditions.

However, when it comes to the actual interest rates, don’t assume that all lender’s rates are the same. Some lenders can offer better pricing options.

There are a few strategies that could help you get the lowest private student loan rates, such as applying with a co-signer or choosing a short repayment term.

If you’re comparing a fixed and variable interest rate on a student loan, it’s important to consider your overall repayment strategy to choose the most optimal rate for your needs. Here’s how to decide between a fixed or variable student loan interest rate:

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You could choose a fixed-rate student loan because of perks like predictable monthly payment, fixed repayment cost and because it could be less expensive for longer repayment periods.

However, downsides include higher initial interest rate, unchanging rates and higher loan cost for shorter repayment terms.

The reasons to choose a variable-rate student loan include lower initial interest rate, lower initial payments and potential for interest rate drops.

However, why you might not want to choose it is because interest rate could change, unpredictable payments or because it’s potentially more expensive overall.

How do I get a student loan with the lowest possible rate?
Here are a few strategies that could help you get a good interest rate on a private student loan:

Good credit score: Your credit score is one of the main factors that will determine the rates you’re offered. You’ll generally need good to excellent credit to qualify for the lowest interest rates — a good credit score is usually considered to be 700 or higher.

Apply with a co-signer: If you have less-than-perfect credit, applying with a co-signer could make it easier to get approved for a private student loan. Having a creditworthy co-signer might also get you a lower interest rate than you’d get on your own.

Choose a shorter repayment term: Many lenders offer lower rates for shorter repayment terms. It’s usually a good idea to pick the shortest term you can afford to keep your interest costs as low as possible.
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Key takeaways?

When choosing a lender for your student loans, here’s what all you need to consider. Although choosing a student loan lender can seem cumbersome, knowing what to weigh can make the process easier.

Low interest rates are important, but also be sure to look for lenders with flexible repayment options that can help you match your monthly loan payments to your budget.

Also, be on the lookout for any application or origination fees as well, as these can have a significant bearing on the budget that you have allocated for the loan.

It’s important to research and compare your options from as many lenders as possible. This way, you can find the right loan with the most favourable rate for your needs.