Education loans have emerged as a much-needed motivation for students who want to pursue higher studies but are constrained by financial issues.
Even students who could afford their higher education on their own now opt to take out student loans. This is because an education loan may enable you to maintain your own funds for unforeseen expenses, as well as enable you to receive tax benefits and raise your CIBIL score.
What is the moratorium period for an education loan?
The duration of a borrower’s exemption from loan repayment is known as the moratorium period. Loans taken out for education are subject to this repayment holiday.
All government bank education loan programs are required by the Reserve Bank of India to provide a moratorium or grace period on loan repayment.
Like other loans, an education loan has an interest rate attached to it. This interest starts to accrue the first month after the student loan is approved. However, government banks are required to grant borrowers of education loans a repayment holiday.
This indicates that during the designated moratorium time, students are not required to pay back the interest. It should be kept in mind that during this time, the interest is not waived but simply deferred.
When loan repayment begins, students will have to pay this accrued interest (split equally). Despite the fact that each bank has its own terms and conditions, most financial institutions offer a moratorium period of one year after the completion of the program.
How do the grace period and moratorium period differ?
A grace period and a moratorium period are frequently confused in the market. It is critical to understand that a grace period is a predetermined period after payment is past due during which, the payment may be made without incurring a penalty.
On the other hand, a borrower is not required to make payments during a moratorium period.
Also Read: Is Collateral Compulsory for Education Loans?
What are the benefits of an education loan moratorium period?
Let’s examine some of the benefits of the repayment holiday.
- With an education loan, the student will have less financial stress while they are studying.
- The student can focus on their academics without having to worry about money during this grace period because the bank does not impose any penalties for non-repayment.
- After completing the program, individuals can focus all of their efforts on finding a career that suits them within a year of graduation without having to worry about debt payback for a year.
- Throughout this time without repayment, the student’s credit score is unaffected.
During the moratorium period, the parents, who are typically co-borrowers of student loans, are not required to make any repayments.
Also Read: Common mistakes when taking an education loan
Is there a downside to the moratorium period?
The moratorium term on student loans, like every coin, has both advantages and disadvantages.
- As was previously noted, the interest is delayed rather than waived during this time. As a result, it basically accumulates and the student is then required to pay it back.
- Due to the absence of payments during this period, the loan duration may somewhat lengthen.
- Some financial institutions impose simple interest throughout the study period and compound interest during the moratorium period, which raises the overall amount of interest that has accrued.
Despite its many benefits, the most straightforward approach to get around the moratorium periods’ drawbacks is to begin payments as soon as you can.
Perhaps, even while you’re still in school with the help of a part-time job.
What is the moratorium period for the various Indian banks?
Lenders have different moratorium periods. On the basis of the different types of lenders, we may broadly divide this period. The moratorium of various lenders is as follows:
- Public-sector Banks: Government banks often have a moratorium period of the course period plus six months. During this moratorium, there are no payments that students are required to make.
- Private-sector Banks: In private banks, the moratorium term is often the course period plus 12 months. However, throughout this moratorium time, the borrower must pay a certain sum of simple interest. After the moratorium period, installments beginning with a portion of the principal amount will be made.
NBFCs: Typically, an NBFC’s moratorium period is equal to the course period plus an additional 12 months. However, during this moratorium time, the borrower must pay a simple interest sum or some partial interest (determined and disclosed throughout the loan process).
After the moratorium period, installments that include some of the principal amounts begin.
Conclusion
A moratorium period is a great way to reduce the pressure of repayment on a student while studying. It’s crucial to remember that this time period does not come with interest.
As a result, the interest charged on the remaining balance of an education loan will be lower the earlier a student begins loan repayment.
If there is any confusion regarding these financial issues or if any information or guidance is required, our team of financial advisors is constantly available for you.
