Education Loan Moratorium Period: Why It Matters

A moratorium period effectively gives students time off from their liabilities for 1-year after the course ends, and lets them find a job to pay off their Education Loan.

With higher education becoming expensive, both parents and students are left with no option but take the help of borrowing. And if you are aspiring for a quality education or longing for an international degree, then this cost can rise further, and you will have to arrange a massive amount. In such situation, students and their families often turn to a bank and other financial institutions looking for an Education Loan.

Education Loan: What You Need To Know

Financial institutions segregate education loan as a priority sector. In fact, it can be extremely easy to secure an education loan if you get admission in a credible university. Banks and other lending institutions look for accreditation of the educational institution you wish to attend, the current financial status of the student and the parents (in case of guarantor) and placement history of the educational institution.

If the university or college you’re applying to has a favourable placement history, then chances are that your loan will be approved. However, you would still need to make at least 5% down payment of the total cost of the course on your own if you’re to get a loan. This rate varies depending on whether the college is in India or abroad. If you’re applying to a college in India, you would need to pay a minimum 5% down payment, while applying abroad would require a 15% down payment.

For loans less than Rs 4 lakhs, there’s no co-pay or guarantor required, but anything in excess of that would require a guarantor. Generally, parents sign as guarantor to their ward’s loan. In such cases, they would need to furnish proof of their annual income and other assets they might hold.

What Is Moratorium Period?

The interest rates in education loan vary across the board with some institutions charging as low as 8%, while others will charge up to 13%. The interest rate will also depend on the amount of the loan. The RBI has put a cap on the loan amount for domestic education at Rs 10 lakhs, while foreign education will get you a loan up to Rs. 20 lakhs.

The interest is generally accrued from the first month itself, but in some cases, students can start to pay it off only when they have a job. This grace period is called moratorium period. Therefore, a moratorium period is the specific period of a loan tenure when the borrower does not have to repay anything to the lender. The interest income, however, will get accrued in your personal loan account even if you are not paying anything. The interest accrued during the grace period is later spread out across the pending EMIs.

Banks have been asked by the RBI to provide a 1-year moratorium period to the students, which would provide the students a 1-year grace period from the day of graduation to start paying off their loan.

The moratorium period feature of an education loan makes it more preferable over Personal Loans. Personal Loan doesn’t offer the benefits of a moratorium period and the repayment of the loan will start from the beginning.

Students can also start paying EMI (easy monthly installment) during the moratorium period, which would ultimately help them relieve the interest burden.

Benefits Of Moratorium Period

Before the existence of moratorium period, banks would ask students to start paying EMIs from the time their course ended without even having a job in hand. This would make things difficult for students and they were often forced to take up a part-time job in an effort to pay off their loans.

A moratorium period effectively gives them time off from their liabilities for 1-year after the course ends and lets them find a job that can support them and help them pay off their liabilities. However, even though students are not required to pay EMIs till moratorium period is on, the interest still accrues and adds to the burden. The best way to make use of the grace period is to start paying the EMIs before the period ends.

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