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A critical feature of an education loan to study abroad is the moratorium period, which provides temporary relief from repayment obligations during studies. But what is the moratorium period in an education loan?
This blog explores what a moratorium period in an education loan entails, its significance, and how it impacts your financial journey. Without further ado, let’s get started!
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What is the Moratorium Period in Education Loans?
The Moratorium period in an education loan to study abroad refers to a specific time frame during which borrowers are not required to make repayments on the principal amount or, in some cases, interest.
This period allows students to focus on their education without the immediate burden of loan repayments. Key aspects of the moratorium period include:
- Duration: Usually spans the entire course duration plus 6–12 months after completion, depending on the lender’s policy.
- Purpose: Provides financial flexibility, allowing borrowers to secure employment before starting repayments.
The Reserve Bank of India (RBI) mandates that all government banks giving education loans in India offer a moratorium period for education loans, ensuring students have breathing space to transition into their careers.
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How Does the Moratorium Period Work?
The moratorium period in an education loan in India operates differently based on the type of lender: government banks, private banks, or Non-Banking Financial Companies (NBFCs). Understanding its mechanics helps borrowers plan their finances effectively.
Moratorium in Government Banks
Government banks offer student-friendly terms, often including a payment-free moratorium period in an education loan. During this time, borrowers are not required to make any payments, though interest may still accrue.
- Duration: Course duration plus 6–12 months post-course completion or until securing a job, whichever is earlier.
- Interest: Simple interest accrues but is deferred and added to the principal after the moratorium ends.
- Example: For a 2-year master’s program, the moratorium might extend up to 3 years, giving ample time to find employment.
The Central Sector Interest Subsidy Scheme (CSIS) further supports eligible students from economically weaker sections by covering interest during the moratorium for loans up to INR 10 lakh for professional or technical courses in India.
Moratorium in Private Banks and NBFCs
Private banks and NBFCs have stricter policies, often requiring partial or full interest payments during the moratorium period in an education loan, unlike Nationalised banks.
- Duration: Typically course duration plus 12 months.
- Interest Payments: Borrowers may need to pay simple interest or a portion of it during the moratorium.
- Repayment Start: Principal repayments begin after the moratorium, with accumulated interest added to the loan.
For example, if you borrow INR 10 lakh for a 3-year course, a private lender might require you to pay simple interest monthly during the moratorium, reducing the principal burden later.
Benefits of the Moratorium Period in An Education Loan
The moratorium period in an education loan offers significant advantages, making education loans more accessible and manageable for students pursuing international education.
- Focus on Studies: No repayment obligations allow students to concentrate on academics without financial stress.
- Time to Secure Employment: The grace period post-course completion provides time to find a job and stabilize finances.
- No Credit Score Impact: Non-payment during the moratorium does not affect your credit score, as no penalties are imposed.
- Financial Flexibility: Students can allocate funds to other expenses, such as living costs or certifications, during the moratorium.
For instance, a student completing a 2-year program abroad can use the 6–12 month grace period to secure a job, ensuring they start repayments with a steady income.
Interest Accumulation During the Moratorium Period
While the moratorium period in an education loan offers relief, it’s not interest-free. Interest continues to accrue, impacting the total loan cost. Understanding how this works is crucial for effective financial planning.
- Government Banks: Simple interest accrues during the moratorium and is added to the principal, increasing the loan amount to be repaid via Equated Monthly Installments (EMIs) after the moratorium.
- Private Banks/NBFCs: Borrowers may need to pay simple or partial interest during the moratorium, reducing the interest burden later.
For example, a INR 10 lakh loan at 10% annual interest over a 3-year course with a 1-year moratorium could accrue INR 4 lakh in simple interest if no payments are made during the moratorium, significantly raising the repayment amount.
Strategies to Manage Interest
To minimize the interest burden, consider these approaches:
- Pay Interest During Moratorium: If feasible, paying simple or partial interest during the moratorium reduces the principal amount.
- Explore Subsidies: Check eligibility for schemes like CSIS, which covers interest for eligible students during the moratorium.
- Prepay When Possible: Early repayments, even small amounts, can lower the total interest paid over the loan tenure.
Starting repayments early can save significant interest costs, especially for private bank or NBFC loans with a higher education loan Interest rate.
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- Smart Tips for Education Loan Repayment for Students
- A Guide to NRI Account Opening for Students in India
The moratorium period in an education loan is a valuable feature that eases financial pressure during and after your studies abroad. By understanding what the moratorium period in an education loan entails, its benefits, and how interest accrues, you can make informed decisions to manage your loan effectively.
FAQ
The moratorium period in an education loan is a grace period during which borrowers are not required to repay the principal amount of their education loan. It typically covers the course duration plus 6–12 months after completion, allowing students to focus on studies and secure employment before starting repayments.
Yes, interest accrues during the moratorium period. In government bank loans, simple interest is deferred and added to the principal after the moratorium. Private banks or NBFCs may require partial or full interest payments during this period.
Yes, you can choose to pay interest or make partial payments during the moratorium, especially with private banks or NBFCs. This reduces the overall interest burden and lowers future EMIs.
The moratorium period typically lasts for the course duration plus an additional 6–12 months post-completion. For example, a 2-year course may have a moratorium of up to 3 years, depending on the lender’s policy.
No, there are no penalties for non-payment during the moratorium period, as it is a standard feature of education loans. This ensures your credit score remains unaffected during this time.
After the moratorium period, borrowers begin repaying the loan through Equated Monthly Installments (EMIs), which include both the principal and accrued interest. Government banks may defer interest until this point, while private lenders may require earlier interest payments.
In exceptional cases, such as difficulty finding employment, some lenders may extend the moratorium period. However, this is subject to the lender’s discretion and may involve additional documentation or interest payments.
Yes, most education loans, especially from government banks, include a moratorium period. However, terms vary—government banks offer full repayment relief, while private banks or NBFCs may require interest payments during this period.
Interest accrued during the moratorium period increases the total loan amount. For example, an INR 10 lakh loan at 10% interest over a 3-year moratorium could add INR 3 lakh in interest, raising the repayment amount unless interest is paid during the moratorium.
Yes, schemes like the Central Sector Interest Subsidy Scheme (CSIS) cover interest during the moratorium for eligible students from economically weaker sections pursuing professional or technical courses in India, up to a loan amount of INR 10 lakh.
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