Education loan EMI:
what happens to interest while you study

What the moratorium really delays

An education loan usually comes with a repayment holiday called the moratorium. It covers the length of the course and a further period, commonly six months to a year, to let the student find a job. During that time the lender does not require EMIs.

That is often read as 'no payments, no cost', which is the mistake to avoid. Interest is charged from the day each instalment of the loan is released. The moratorium only postpones when you have to start paying, and what happens to the interest in between depends on the loan terms: you may be allowed to pay it as you go, or it may be added to the loan.

Lenders, schemes and government interest-subsidy programmes differ here, and some subsidise interest for eligible students during the moratorium. Read the sanction letter for the words 'simple interest', 'serviced' and 'capitalised' before relying on any estimate.

How the interest builds up

During the study period the loan is normally disbursed in tranches, such as one per semester or year, and each tranche earns interest from its own release date. To keep the sums readable, the first example treats the whole amount as drawn at the start.

Interest-subsidy schemes, where they apply, usually cover the interest for the moratorium only for eligible students and for loans up to a stated limit. If you qualify, the principal at the start of repayment equals the amount drawn, which is the best case in the table above.

Two ways to handle the interest

If the interest is left unpaid it is usually capitalised: it joins the principal when repayment starts, and the EMI is worked out on the bigger sum. Here the new principal is ₹10,00,000 + ₹4,50,000 = ₹14,50,000. Repaying over 7 years (84 months) at the same 10% gives an EMI of ₹24,072.

The alternative is to pay the accruing interest during the course. On ₹10,00,000 at 10% that is ₹8,333 a month, an amount many families can manage, usually from the parents' income. The principal then stays at ₹10,00,000 and the later EMI over 84 months is ₹16,601.

Paying during study means you hand over ₹4,50,000 in instalments and then ₹13,94,499 after the course. Capitalising means no outflow until the end, and then ₹20,22,024. The difference in what you repay after the course is ₹6,27,525, which reflects interest on interest.

One more subtlety is the day interest is added. Some lenders add accrued interest to the principal once a year during the course, others only when repayment starts, and annual addition means the later interest is charged on earlier interest. Over a four-year course the compounding version costs noticeably more than the simple one used here, so ask which applies.

Tranche disbursement reduces the study-time interest

The earlier example overstated the interest because few students get the whole amount on day one. Suppose the ₹10 lakh is released as ₹2.5 lakh at the start of each of four years. The first tranche accrues for 54 months, the second for 42, the third for 30 and the fourth for 18.

Many fee components, such as hostel and exam fees, are released at different times too, so your actual figure will sit somewhere between the simple estimate and the tranche version. Ask the bank for a repayment schedule once the course ends.

Longer repayment lowers the EMI and raises the total

After the moratorium you choose, within the lender's limit, how long to take. Longer tenures cut the monthly figure and increase the interest. The table shows the capitalised principal of ₹14,50,000 at 10% over three tenures.

The best period depends on the first salary. A graduate expecting a starting salary of around ₹40,000 a month may be stretched by a ₹30,800 EMI, and a ten-year plan at around ₹19,000 is more realistic. Many borrowers then step up payments when pay rises, which is allowed by most lenders as part-prepayment.

Prepaying in the early years of repayment does the most good, since the balance is at its highest and interest is the biggest part of each EMI.

Practical points before you sign

Co-borrowers matter as well. The parent or guardian who co-signs is equally liable, and missed EMIs affect their credit record, not just the student's. Agree on who pays what before the loan starts.

• Check whether the lender calls the moratorium interest 'simple' or 'compounded' and at what intervals it is added.
• Ask if payment of interest during the course is allowed and whether it lowers the later EMI. It should.
• Look at the maximum tenure; longer tenure shrinks the EMI but raises total interest.
• Find out when the moratorium ends if you complete the course early or take a break in studies.
• Section 80E of the Income-tax Act has allowed a deduction for interest paid on an education loan for a limited number of years. Whether you can use it depends on the tax regime you choose, so check the current rule.