I am studying a course on Financial Management as a part of our third term here at IIM Lucknow. In that, we get acquainted to concepts like present value, discount rates, cash flows etc. I just thought about applying these principles to an educational loan.
Below, I make a comparison of paying out now v taking an educational loan.
Assume that you have taken an educational of Rs 2,00,000 on 1st Jan 2009. The interest on educational loan is calculated assuming simple interest till the course gets over and after that the interest is compounded. Lets us assume that the course gets over in March 2010. So, the interest accrued at the end of March 2010 is Rs 25,000 (S.I @ 10% for 15 months). From April 2010, the principal and interest = Rs. 225000 has to be repaid in EMI. Suppose, if the tenure of repayment is 5 years, the EMI (compounded monthly) comes to be Rs 4780.59
As per the existing Income Tax rules in India, the interest on educational loan is tax exempted. Taking that into account, the present value of cash outflows from our hand is Rs 184862.6. If it has to be paid out now, one has to pay Rs 200000. This means, one saves a little over Rs 15000 as on today’s value by taking an educational loan of Rs 200000
I have made a simple model of the same in google spreadsheet.
Views, comments and criticisms are invited.
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