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!
