Moratorium In Education Loans: How It Works And Why It Matters

While an education loan funds your studies, starting repayment right away is often difficult, especially if the student is still in college with no income.

While they provide financial relief, moratoriums involve crucial details, like interest accrual and repayment strategies which borrowers should know about.

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An education loan can be a lifeline for students chasing their dreams, whether it’s a degree in India or a course overseas. While an education loan funds your studies, starting repayment right away is often difficult, especially if the student is still in college with no income. That’s where the moratorium comes in, a grace period that lets you finish your course, find a job, and start earning before EMIs kick in. 

While they provide financial relief, moratoriums involve crucial details, like interest accrual and repayment strategies which borrowers should know about. Understanding how these details work can help you manage your loan better while also saving significantly in interest payments. Let’s dive in. 

Must-know facts about education loans

Getting an education loan is often straightforward if you have admission to a recognised university. Lenders check the institute’s accreditation, your family’s financial status, and its placement record before approving the loan. A good placement history increases your chances of approval. But, you may have to fund part of the course cost yourself, depending on the college you join. For loans up to Rs 4 lakh, no guarantor is needed. For higher amounts, a guarantor, usually a parent, must provide proof of income and assets.

The basics of moratorium period 

The moratorium period is a part of the loan tenure when you don’t have to pay EMIs until you complete your studies. Financial institutions typically offer the course duration plus six months to one year as a moratorium. 

For example, if your degree takes two years and your bank gives a one-year post-course moratorium, your EMIs start after three years. However, this is not a waiver and the interest continues to accrue on the loan during this period.

If you borrow Rs 10 lakh at 9 per cent interest for seven years, the first three years’ unpaid interest could add over Rs 2.7 lakh to your total repayment. Knowing this early helps you decide whether to pay interest during your studies or let it accumulate.

Should you pay interest during the moratorium?

If possible, try to pay the interest amount during the moratorium. Even small part-payments can reduce your debt later. 

For example, paying Rs 3,000 a month towards your Rs 10 lakh loan at 9 per cent will lower accrued interest significantly, even if you cannot pay the full Rs 7,500 monthly interest. Think of it as proactive debt control. Taking up part-time jobs or internships can help cover this cost.

Government schemes and subsidies

The Government of India offers schemes like the Central Sector Interest Subsidy Scheme (CSIS) for students from families with annual incomes below Rs 4.5 lakh. Under CSIS, the government pays the interest during the moratorium for studies in India.

This applies only to loans from scheduled banks and up to Rs 7.5 lakh. Many state governments have similar schemes, so check your eligibility before borrowing.

Planning repayment after the moratorium

Once the moratorium ends, repayment begins, which is EMIs on the accumulated loan amount i.e. principal plus interest. If you borrowed Rs 10 lakh and let interest compound, EMIs could be over Rs 20,000 for a seven-year term. If you kept the principal intact, EMIs might be closer to Rs 16,000. This difference can be significant for a fresh graduate. It is wise to use the final year of your moratorium to budget, save a cushion, and, if possible, prepay a portion to reduce EMIs from the start.

The moratorium period is not a repayment holiday but a structured pause to help you move from student life to earning. The key is to understand its cost and take steps to manage it.

(The author is the CEO at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)