Loan Payment Affordability - Update

This post is an update to my blog entry dated December 9, 2009.  Now that the placement season at ISB is truly underway, I thought this was an apt time to reevaluate the monthly loan payments as a percentage of the total salary.

During the past few months I have been constantly interacting with my future classmates, current ISB students and recent alums. Several facts have come to my notice, because of which, I am modifying the assumptions I used as part of my previous analysis.  

Based on my discussions with current students, a salary of Rs 14,00,000 is considered a "good" package on campus. Also, thanks to several people of google groups, I learned that many offers were made in the Rs. 10-12,00,000 range. These figures are substantially lower than the Rs. 19,00,000 I had assumed in my previous analysis.  Therefore, as part of this analysis, I looked at three (3) different scenarios which are presented below. 

Common Assumptions (left unchanged)

Loan Amount = Rs. 18,00,000 (assuming the deposit was paid out of pocket)

Interest Rate - 10.5% (Source: UBI - ISB website)

Term - 7 Years

Therefore, Installment = Rs 30,500/month or Rs 3,66,000/year

Interest Paid during 1st yr = 15,000/month or Rs 1,80,000/year

Tax Bracket = 30%

Deduction = Rs 4,500/month or Rs. 54,000/year

Net installment = Rs 30,350 - Rs 4,500 = Rs 26,000/month or Rs 3,12,000/year

Take home salary = 62% of CTC

Salary Assumptions:

Scenario 1 - Great (in most cases)

Average Salary - Rs 19,00,000 (CTC)

Take-Home = Rs 95,000/month or Rs 11,40,000/year

In-Hand (after loan payment) = Rs 95,000 - Rs 26,000 = Rs 69,000/month or Rs 8,28,000/year

Scenario 2 - Reasonable (in most cases)

Average Salary - Rs 14,00,000 (CTC)

Take-Home = Rs 72,000/month or Rs 8,68,000/year

In-Hand (after loan payment) = Rs 72,000 - Rs 26,000 = Rs 46,000/month or Rs 5,52,000/year

Scenario 3 - (no comments)

Average Salary - Rs 11,00,000 (CTC)

Take-Home = Rs 57,000/month or Rs 6,82,000/year

In-Hand (after loan payment) = Rs 57,000 - Rs 25,850 = Rs 31,000/month or Rs 3,72,000/year

Of course, these numbers change drastically if the loan amount was low. For example, a person making Rs 14,00,000 with a Rs 10,00,000 loan would have approximately Rs 58,000 left after paying the monthly installment. These numbers are personally disappointing to me. However, I console myself by reading Sanjeev's post and reminding myself that I am doing this for the long term.

Loan Payment Affordability

To me, paying for an MBA is a personal expense, rather than an investment. Therefore, I hadn't considered the repayment schedule, monthly educational loan payments or return of investment. During the US admits teleconference that was conducted on December 6, 2009, we were discussing placements, loans, lifestyle etc.

This led me to analyze the various loan options, average post ISB salary (not CTC, but in hand), the expected loan payments and the possible lifestyle. I am sharing some results of my analyses in this blog post. I would certainly appreciate feedback.

Lets take the case of an average Individual A who uses a loan of Rs 18 Lakhs to fund his ISB education.

Loan Assumptions:

Loan Amount - Rs 18,00,000

Interest Rate - 10.5% (Source: Indian Bank - ISB website)

Term - 7 Years

This would translate into a monthly payment of Rs 30,350

American financial advisors recommend that the monthly loan payment should not be in excess of 15% of your disposable income in order to maintain a standard of living commensurate with your income level i.e. you will not have to sacrifice and cut back on expenses. This would imply that a person should have disposable income of Rs 2,02,333 per month, and yes, this is disposable income (after rent, utility bills, food etc.). This would not be practical under most scenarios (assuming the individual is employed in India).

Alternatively, we can estimate the average take home pay of an ISB grad (at graduation) and calculate the percentage of his/her salary that will be spent on the education loan.

Assumptions:

Average Salary - Rs 19,00,000 (CTC)

Take home salary = 62% of CTC (Source - Great Lakes)

= Rs 11,40,000 per year or Rs 95,000 per month

Interest deduction:

Assuming a declining interest component, the interest payments during the 1st year after graduation would be approximately Rs 15,000 per month. Since Individual A belongs 30% income tax bracket, the interest can be deducted from Individual A's taxable income. Thus, he/she would save Rs 4,500 a month on taxes.

After making the educational loan payments and adjustments for tax deductions, Individual A would have approximately Rs 70,000 per month left.

As I have never worked in India, I do not know whether my assumptions are reasonable. However, I do want your opinion about the Rs 70,000 number!