Education Loan Moratorium Period: A Detailed Guide

Many students who opt for an education loan are usually unaware of the fact that they do not have to immediately start repaying loans after the loan has been sanctioned. Instead, it is after the moratorium period is over that the borrowers have to start making EMI payments. 

The moratorium period is a term closely associated with education loans about which a student borrower must learn in advance. The moratorium period in education loans is the time allowed by the lender in which the students are not expected to repay the principal amount of the education loan. Since the students must find a job after studying for loan repayment, the moratorium period includes the course duration plus 6 to 12 months after completing the course.

What is the Moratorium Period in Education Loan?

The education loan moratorium period is when a borrower is exempted from repaying the loan. ‘Moratorium’ means temporary prohibition of an activity; hence, the moratorium period in education loans refers to the interval of time in which the borrower need not repay the loan. During this period, the banks do not demand any repayments from the students. The Reserve Bank of India has made it mandatory for all government banks to offer a moratorium period on education loans.

Importance of Moratorium Period Education Loan

A significant number of Indian students seek abroad destinations for higher studies, and many of them rely on education loans for financial assistance. To provide these students a duration to study peacefully and search for a job, it is important to give a moratorium period on education loans. The moratorium, as a banking rule, follows that those who do not repay during the moratorium period must not be treated as loan defaulters. In the moratorium period, simple interest is calculated for the amount disbursed, excluding margin money.

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How Does Education Loan Repayment Work?

During the education loan moratorium period, students are not required to pay EMIs, but interest continues to accrue. Therefore, starting repayment earlier can reduce the total interest paid. Banks offer various repayment options to suit different borrowers' preferences:

• Simple Interest: The student pays the simple interest during the study period. This prevents the interest from being added to the principal amount, resulting in EMIs that consist only of the principal amount plus compound interest.
• Partial Simple Interest: The student pays a portion of the simple interest, with the remaining interest added to the principal. Consequently, compound interest is charged on both the principal amount and the remaining simple interest.
• EMI: The student defers all payments until the end of the moratorium period. Repayments are made through EMIs, and compound interest is charged on the principal amount plus accrued simple interest.

Choosing the right repayment option can help manage the financial burden effectively.

Understanding What is Moratorium Period in Education Loan with an Example

Let us understand the concept and purpose of the education loan moratorium period with an example.

For instance, Raj a study abroad applicant took a secured education loan of INR 50 Lakh for his Master's course in the USA in January 2024. Now Raj does not need to start repaying his loan during his course, instead, his repayment will start 12 months after his course is completed. Which means his repayment will start in 2027.

The lender understands that the borrowers cannot repay the loan immediately after their studies. Hence, students are given a moratorium period to find a job and start their repayments after the moratorium period.

What is the Difference Between the Education Loan Moratorium Period and the Grace Period?

People commonly confuse a moratorium period with a grace period. It is vital to know that a grace period is a set duration after payment is *outstanding payment, where a payment can be made without any penalty charged.

On the other hand, in a moratorium period, a borrower doesn’t have to pay during the course period. Also, a moratorium period length can vary from weeks to months, whereas a grace period length is generally 15 days. 

*Outstanding payment refers to the unpaid balance amount of the current due. 

Advantages of a Moratorium Period in Education Loan

A moratorium period in education loans provides several key benefits that can significantly ease the financial burden on students and their families. Here’s a detailed look at these advantages:

1. Financial Relief During Studies

The primary advantage of a moratorium period is that it alleviates the financial pressure on students. Without the need to make repayments while studying, students can focus on their education without worrying about immediate loan repayments.

2. Better Repayment Planning

The moratorium period gives students time to secure employment and establish a steady income stream before they start repaying their loans. This period allows for more effective financial planning and budgeting, ensuring that students are better prepared for loan repayments.

3. Unaffected Credit Score

During the moratorium period, students are not required to make any payments, which means there is no risk of defaulting on loan payments. This helps maintain a positive credit score, which is crucial for future financial endeavors, such as applying for other loans or credit cards.

4. Relief for Co-Applicants

Often, parents are co-applicants in education loans. The moratorium period ensures that they do not have to bear the repayment burden while the student is still studying. This can be especially beneficial for families managing multiple financial commitments.

5. Extension Options

Some banks offer the option to extend the moratorium period under certain conditions, such as extended study duration or pursuing higher education. This additional flexibility can provide further financial relief and accommodate the student’s academic and career plans.

6. Improved Job Prospects

Without the immediate pressure of loan repayments, students can take the time to find jobs that are better suited to their qualifications and career aspirations rather than settling for the first available opportunity.

A moratorium period education loan is a significant feature that provides various financial, psychological, and strategic benefits. It not only supports students in managing their finances during their studies but also ensures that they are better prepared for loan repayments, thereby fostering a more successful transition from education to employment.

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What is the Moratorium Period Offered by Different Lenders in India?

The moratorium interest capitalization in education loan differs for different types of lenders. Sometimes it can also vary within the same type of lender. Moratorium periods of different lenders are as follows -

• Public Sector Banks: Usually the moratorium period in government banks is a course period + of 6 months. Students do not have to make any type of payment during this period.
• Private Sector Banks: The moratorium period in private banks is usually a course period + 12 months. However, the borrower has to pay a simple interest amount during the moratorium period. Installments, including some part of the principal amount, start after the moratorium period.  
• NBFCs: In general, the moratorium period in NBFCs is a course period + 12 months. However, the borrower has to pay a simple interest amount or some partial interest (set and communicated during the loan process) during this moratorium period. Installments including some part of the principal amount start the moratorium period.

Several study-abroad aspirants often tend to miss crucial topics such as a moratorium period in education loans, margin money, processing fees, and many more. It is important for borrowers to be familiar with such concepts to make an informed decision. We at GyanDhan understand that taking an education loan is a huge financial decision therefore, it is important to cover all crucial factors before choosing a lender.

Our expert education loan counselors will evaluate your profile and select the best education loan lender for you and if needed we will also customize an education loan for you. And the best part is we do not rely on one lender instead we initiate your loan process with 3-4 lenders in a single go. We make sure that you get the best education loan deal. Not only this, we provide end-to-end assistance, from evaluating your profile to the actual disbursement we are always by your side. Wondering how to start? Check your loan eligibility today to get started. 

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