Seeking higher education is an important step towards establishing a successful career. However, the cost of education can be financially demanding for families. To fill this gap, education loans have emerged as a preferred option.
The moratorium period is one of the significant features of an education loan, and it plays a vital role in planning the repayment of the loan. This article explains the concept of the moratorium period in education loans, its impact on borrowers, and how to manage repayment effectively. Students and their families can make informed financial decisions after understanding these aspects.
What is the Moratorium Period for an Education Loan?
Education loan moratorium time is the interval during which borrowers do not have to pay the principal loan value. The common duration of an education loan moratorium period is the term of the studies plus a six-month to one-year grace period on completion of education. The education loan moratorium gives students adequate time to prioritise their studies while they prepare themselves for repayment.
Key Features of the Moratorium Period
Some of the characteristics of the moratorium period for education loans are as follows:
- Includes course length plus some further grace period.
- Interest accrual is subject to the loan agreement.
Understanding Interest Application During the Moratorium Period
Interest application during the moratorium period is based on the nature of the education loan. There are two modes in which interest can be applied:
- Simple interest: Some loan providers may require borrowers to pay interest during the moratorium period. This may result in a lower overall repayment amount.
- Accrued interest is added to the principal: The interest accumulated during the moratorium period is added to the principal amount of the loan. This can result in a higher overall burden of repayment.
It is necessary for parents and students to thoroughly go through the loan agreement to know how interest will be treated during this time.
Advantages of the Moratorium Period on an Education Loan
The moratorium period in education loans offers benefits, including:
- Financial Flexibility: Allows students to focus on their studies without worrying about loan repayment immediately.
- Time to Secure a Job: It provides students with additional time to find jobs before beginning repayments. It also minimises the likelihood of financial duress shortly after graduation.
- Strategic Financial Planning & Reduced Pressure: The moratorium period helps students and parents to plan for EMI repayments, easing the financial burden on families by promoting disciplined savings and better resource management before repayment begins.
Understanding Repayment After the Moratorium Period
After the moratorium period, EMI payments in full (interest + principal) start. Borrowers need to keep the following points in mind:
- Repayment Term: Education loan tenures are generally up to 15 years. Longer tenures mean lower EMIs but more total interest paid, whereas shorter tenures mean higher EMIs but less total interest paid.
- EMI Calculation: The EMI is calculated based on the loan's principal amount, interest rate, and loan period. The Credila EMI calculator can help you estimate the monthly repayment and assist you in aligning your budget accordingly.
- Prepayment Options: Early or partial repayment facilities may also be available. Knowledge about the repayment period and prepayment terms can allow borrowers to minimise the cost of interest.
Strategies for Maximising the Benefits of the Moratorium Period
To make the most of the moratorium period and ease repayment, students can follow these strategies:
- Develop a Financial Plan: Estimate future earnings after graduation and prepare a budget for loan repayment. Pre-planning facilitates easy financial management.
- Take Advantage of Loan Repayment Benefits: Look into government subsidies and tax benefits for education loans under Section 80E*. Tax rebates on interest payments may help you save during repayment.
- Establish a Strong Credit Score: Even during the moratorium period, timely payment can help in maintaining a good credit record. This score can assist you in getting improved financial terms and conditions in the future.
Disclaimer: Under the old tax regime. Please consult your Chartered Accountant or Tax Advisor for information specific to you.*
Conclusion
The moratorium period of an education loan is an important aspect that gives students financial relief while they concentrate on their studies. Knowing how interest builds up and how to repay the loan effectively can help you manage the loan effectively. For those exploring education loans for study abroad, Credila provides education loans to students with flexible repayment plans..
Disclaimer:
As of March 31, 2024. T&C apply.
Credila Financial Services Limited (Formerly known as HDFC Credila Financial Services Limited)
The education loan facility provided by Credila Financial Services Limited ('The Company') will be at the sole discretion of the Company and within the Company's prescribed credit and underwriting norms/guidelines prevailing at the time of processing and disbursing the education loan. The Company maintains the right to change the interest rate at any time and at its sole discretion, without prior notice.
