Should I use surplus to close education loan?

—Name withheld on request

Given the rate of interest of 9.5% on the education loan, you can exercise the option of prepaying a major portion of your loan that can reduce your EMIs meaningfully in the future.

The income tax deduction on education loan interest payment is definitely a cherry on the cake for individuals who continue to file income taxes according to the old regime, where such deductions and exemptions are available.

On the contrary, investments are tricky when the funds are parked in market-tradable securities. There remains a possibility of your funds going south in case a high risk and high return asset fails to meet return expectations. Volatility is part of market-linked instruments, particularly those that can potentially generate higher returns.

Investments are always considered the best for wealth maximization. When it comes to choosing between clearing off a high-cost debt and investing in a high risk and high return asset, repayments should take the lead. You can definitely consider investing smaller amounts which don’t affect your repayment plans or your ability to close the loan sooner.

Investing in a lump sum manner can resume once the debt is entirely cleared from your balance-sheet. A debt-free investment strategy can help you take calculated risk as you can exceed your risk-taking capacities in the wake of higher returns. Taking risks once in a while is a part of the investment journey, but it can be a riskier strategy if you are already debt-laden. So, becoming debt-free can actually help you in your investment journey.

Raj Khosla is founder and managing director of MyMoneyMantra.com

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Updated: 23 Oct 2023, 10:31 PM IST