In recent years, India has experienced varying inflation rates. In 2023, the overall inflation rate was approximately 5.36%. However, the education sector has consistently seen higher inflation rates, averaging between 8-12% annually. This indicates that the cost of education is rising faster than general inflation.
The cost increases even further if you intend to pursue higher education at a reputable university overseas. (This is also due to the declining value of the Rupee as compared to the US Dollar.)
This makes getting low-interest education loans an important milestone of the study-abroad journey for many students to finance their academic pursuits.
In fact, in 2022-23, Indian students availed education loans worth Rs. 17,668 crore.
These education loans offer much-needed financial assistance for education. It helps students pay for tuition fees, living expenses, and other related costs.
However, many students and parents are not fully aware of how repayment works and when it needs to begin. An important aspect of education loans that borrowers should understand is the moratorium period.
It refers to a specific window of time where borrowers are not required to start paying back the loan. Instead, they are granted time to complete education and secure employment. However, the interest keeps on getting accrued this period.
Let’s dive right in.
What is the moratorium period on education loans?
The moratorium period in an education loan is a break period provided by the lender. During this period students are not required to make any repayments.
This period usually includes the course duration and 6-12 months after course completion.
The idea behind the moratorium period is simple.
Students will need time to focus on their studies and later secure a job.
Thus, banks allow them to start repayment only after they begin earning.
During the moratorium period borrowers are exempt from making EMI payments. However, interest continues to accrue on the loan amount.
Usually, his interest might be calculated using the simple interest method. This is then added to the principal amount at the end of the moratorium period.
The Reserve Bank of India has made it mandatory for public sector banks to offer a moratorium period on their education loans. Private sector banks and Non-Banking Financial Companies (NBFCs) may have slightly different terms. However, they do generally follow the same principle.
Also Read: How to Get an Education Loan without Parental Support?
Importance of the moratorium period in education loans
When taking out an education loan, most students do not have a steady income. In case the loan EMIs have to be paid immediately, the burden would fall on the family. Or else, the student won’t be able to fully focus on studies and would be under undue stress.
Thus, the moratorium period plays a key role in easing the financial burden of an education loan.
Here are some key reasons why the moratorium period is important:
- Financial Breathing Room
A moratorium gives students enough time to complete their studies and settle into a job. Once they have a job, they can easily take on the responsibility of loan repayments. This financial cushion helps manage the transition from education to employment more smoothly.
- Encourages Higher Education Abroad
A large number of Indian students dream of pursuing education abroad. However, the cost of tuition (plus living expenses) is significantly higher in foreign countries.
A viable education loan option is thus important to promote international higher education among students.
The moratorium period gives students the peace of mind that they won’t have to start repayment until they are financially stable. This encourages more students to opt for overseas education.
- No Immediate Risk of Default
During the moratorium, students don’t make repayments but they are not considered defaulters. This keeps their credit scores intact without the pressure of immediate repayment. This provision ensures that students can focus on academics and later on job hunting.
Thus, with deferred repayment, it acts as a valuable tool for students to manage finances.
Also Read: Zero Interest Education Loans: Guide To Get the Best 0 Interest Education Loan
How does education loan repayment work?
Every education loan provider has their own repayment structures. Banks and NBFCs offer these options for different financial capacities and student needs. Understanding these options helps make informed decisions that best fit your financial situation.
Some of the models of education loan repayment include:
| Factor | Simple Interest Payment | Partial Interest Payment | EMI After Moratorium |
| Interest Payment During Study | Full simple interest paid | Partial simple interest paid | No payment made |
| Impact on Principal | Principal remains unchanged | Part of interest added to the principal | Both interest and principal increase |
| EMI After Moratorium | Lower EMIs | Moderate EMIs | Higher EMIs |
| Total Loan Cost | Lowest (no compound interest) | Moderate (some interest capitalized) | Highest (compound interest applies) |
| Financial Burden During Study | Moderate | Low | None |
An understanding of these repayment models helps plan your finances and avoid default.
Understanding what is the moratorium period in education loans with an example
To understand the concept of a moratorium period clearly, let’s look at an example.
Background
- Aryan is an ambitious Indian student.
- He has secured admission to a prestigious university in the USA to pursue his MBA.
- It is a 2-year course spread across 4 semesters.
- To finance his education, Aryan applies for an education loan of INR 25 lakhs. (INR 12.5 lakhs for each year). The loan’s repayment duration is 84 months (7 years) and the rate of interest is 7% per annum.
- His course begins in January 2024 and is expected to be completed by December 2025.
- Aryan’s lender offers him a 12 moratorium period after the duration of his course. This makes the total moratorium period to be 3 years or 36 months.
Repayment Options
Aryan is not required to make any payments (for principal or interest) until January 2027. However, he has an option to pay either the simple interest or the full EMIs from the very first month.
Let us how his monthly EMIs will vary based on his choice of repayment option:
- No payments during the moratorium period:
- Monthly EMI after moratorium period: INR 44,334.75
- Total Interest Payment: INR 7,86,619
- Total Repayment Amount: INR 37,24,119
- Full payment of simple interest during the moratorium period:
- Monthly EMI after moratorium period: INR 37,732
- Total Interest Payment: INR 6,69,463
- Total Repayment Amount: INR 31,69,463
In this case, not making any payments during the moratorium period will result in a higher monthly EMI and overall interest. This is because the simple interest charged during the period is capitalized and added to the loan amount. However, if you pay the simple interest (not the principal) during the moratorium, you’d have to pay smaller monthly EMIs later.
Note: The figures are representative and the actual EMIs and interest may vary depending on your lender.
As evident from the example, it is important to know the nuances of the moratorium period.
What is the difference between the education loan moratorium period and the grace period?
Borrowers often confuse the moratorium period with the grace period. And these terms sure seem similar. However, they serve different purposes.
Below we highlight the key differences between the two.
| Factor | Moratorium Period | Grace Period |
| Applies to | Education loans | Credit cards and other loans |
| Duration | Course duration + 6-12 months | Typically 15 days |
| Repayment Requirement | No repayment required during the period | Payment required, but late fees is waived off |
| Interest Accumulation | Interest accrues during the period | No additional interest for late payment |
| Purpose | Provides a break from repayments during study | Prevents penalties for short payment delays |
As evident from the table above, both periods provide a break from repayments. However, the moratorium period allows a significantly longer time. Also, it is specifically designed to accommodate the unique financial situation of students.
Advantages of a moratorium period in education loans
The moratorium period offers several advantages for students and their families. Here are some of the key benefits:
- No need to worry about repayments during studies, allowing students to focus on their education.
- Extra time to secure a job, helping plan loan repayments more effectively.
- Credit score remains unaffected as no payments are required during the moratorium period.
- Co-applicants, often parents, are relieved from the repayment burden during this time.
- Some lenders allow extensions for delayed job placements or extended courses, providing added flexibility.
- Students can explore better job opportunities without immediate pressure to repay the loan.
What is the moratorium period offered by different lenders in India?
The terms and conditions of moratorium periods can vary based on the type of lender. Here’s a quick overview of how different lenders approach moratorium periods in India:
Public Sector Banks
Public sector banks, following RBI guidelines, offer a moratorium period covering the course duration plus 6 months. During this time, students are not required to make any payments. However, the interest is capitalized. (This means simple interest is charged on the education loan and is added to the principal amount).
Private Sector Banks
Private banks also offer a moratorium period for the course duration plus 12 months. However, in most cases, borrowers are expected to pay simple interest during this time. Repayments involving both principal and interest start after the moratorium period ends.
Non-Banking Financial Companies (NBFCs)
NBFCs generally provide a moratorium period similar to private banks. This covers the course period plus 12 months. Borrowers might be required to pay either simple or partial interest during this time.
Different lenders offer varying moratorium terms that are also subject to changes. Thoroughly review the moratorium policies of lenders before taking out an education loan.
Before you start comparing different moratorium period options on your own, it’s important to recognize that the process can be time-consuming and complex.
That’s where FundRight (by GradRight) steps in.
FundRight simplifies this process by allowing you to create one profile and receive competitive offers from multiple lenders, including public and private banks, as well as NBFCs. This competitive approach means lenders come to you with their best terms, including favorable moratorium periods and interest rates. You can then choose the offer that best suits your financial needs, helping you save up to Rs. 23 lakhs on your education loan.
With FundRight, you ensure that you’re making an informed decision without the hassle of applying to multiple lenders one by one. Create your FundRight account and get started today.
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FAQs
The moratorium period is the time during which students do not need to make loan repayments. It typically lasts for the course duration plus an additional 6 to 12 months. This allows students to find a job before starting repayments.
Some banks offer extensions on the moratorium period under special circumstances. This could be due to extended study duration or delays in job placements. You can contact your education loan provider and check the specific conditions for extension.
The moratorium period is generally seen as beneficial for students. This is because it offers financial relief during studies and gives students time to find a job.
However, it can also lead to higher interests later on. This is because the simple interest charged during the period is added to the capital. This increases the overall loan burden if not managed properly.
The moratorium period typically begins as soon as the loan is disbursed. It continues for the course duration plus an additional 6 to 12 months after graduation.
Most education loans are eligible for a moratorium period. Some other types of loans may also offer moratoriums, but this varies by lender and loan type.
