Marketing campaigns for education loans from banks or from non-banking financial companies make it a point to highlight the repayment holiday or moratorium period on the repayment of the loan.
In most cases, the moratorium period extends up to six months after the completion of the course, or till the time the student lands a job, whichever is earlier. Some lenders also provide the flexibility of extending the moratorium by another six months if the student is unable to find a job.
What this means is that you do not have to worry about the payment of EMIs for the education loan till the moratorium period. However, this can increase your overall outgo towards the loan.
Interest kicks in immediately
A delayed start to the EMIs does not mean that the interest is not applicable for the repayment holiday period. In fact, the interest calculation starts immediately after the loan is disbursed.
For instance, for an education loan for a 2-year course taken in June 2018, the repayment holiday will continue till December 2020, and the EMIs will start from January 2021, but the interest will be applicable for the entire period from June 2018 to December 2020.
Earlier, banks and NBFCs regularly allowed borrowers to start paying this interest after the repayment holiday. In such cases, the interest was accumulated for the period and got compounded.
However, since 2016, most banks have started demanding repayment of interest during the repayment holiday period itself. This change has happened due to stricter implementation of loan repayment guidelines, with many banks already stressed under NPAs (non-performing assets) from other segments. This is typically done by the parents or guardians of the student during the course of study, and then the actual repayments in the form of EMIs are taken over by the student concerned.
Banks, however, may still allow for interest payment along with the EMIs after the moratorium period. But the applicant will have to place a request for the same.
What works better for a borrower
Just like any other liability, delay in payment only compounds the burden. Similarly, if the interest payment is delayed, the interest part gets compounded and then gets added to the principal. A new interest amount is then calculated on the new total for subsequent months. Let’s take the example of a ₹20 lakh loan taken at 10% interest per annum for a two-year course. If the interest payment is delayed by a year, in the second year the interest will be applicable not just on the principal ₹20 lakh, but also on the ₹2 lakh that was supposed to be paid on interest. That will be an addition of ₹20,000 in annual interest payment in the subsequent year. The interest burden will increase, in a similar manner, in the third year in case the repayment holiday continues, and so on.
Therefore, repayment of interest right from the beginning actually works in favour of the borrower.