Moratorium period in Education Loan -

Why is the Moratorium Period Important in India ?

In India, the moratorium period plays a pivotal role in the education loan landscape. This period ensures that students, who may not be able to repay immediately after completing their courses, are not treated as defaulters. During the moratorium period, simple interest is calculated on the Loan amount.

The increasing number of Indian students pursuing higher education abroad and relying on education loans for financial support, the moratorium period becomes essential. It allows students the time to focus on their studies, search for employment, and plan for loan repayment without the immediate financial burden.

Understanding the Moratorium Period with an Example -

The concept of the moratorium period in education loans, let's delve into a practical example. This illustration will provide a clearer understanding of how the moratorium period functions and its implications on loan repayment.

1. Loan Details:

• Loan Amount: ₹10,00,000
• Course Duration: 2 years
• Moratorium Period: Course duration(2 years) + 6 months
• Interest Rate: 8% per annum
• Loan Repayment Term: 5 years

2. Moratorium Period Calculation:

The bank disburses the loan amount of ₹10,00,000 at the beginning of "XYZ" first academic year. As per the terms of the education loan, the repayment is scheduled to commence after the completion of the course, allowing "XYZ" to focus on her studies without the immediate financial burden of monthly installments.

In this case, the moratorium period is defined as the course duration plus an additional 6 months. Given that "XYZ" master's program spans 2 years, the moratorium period would be 2 years + 6 months = 2.5 years.

3. Repayment Phase: Upon securing a job, "XYZ" decides to start repaying the loan. The total outstanding amount at the end of the moratorium period, including the principal and accrued interest, is ₹10,00,000 (Loan Amount) + ₹2,00,000 (Accrued Interest) = ₹12,00,000. If "XYZ" opts for a standard EMI-based repayment plan over 5 years at an interest rate of 8%, the monthly EMI would be approximately ₹24332. "XYZ" diligently repays the loan over the agreed-upon tenure, successfully managing her financial obligations.

Difference Between Moratorium Period and Grace Period:

Pros and Cons of the Moratorium Period -

Understanding the advantages and disadvantages of the moratorium period is crucial for borrowers.

Advantages of the Moratorium Period -

• Financial Burden Reduction: The moratorium period reduce the financial burden on students during their study period.
• Better Repayment Planning: It allows students to plan their repayments more effectively, considering their financial circumstances.
• Credit Score Impact: The credit score remains unaffected during the non-repayment period, provided students adhere to the terms.
• Parental Relief: Co-borrowing parents, common in education loans, are not obligated to make repayments during the moratorium period.
• Possibility of Extension: Some banks offer the option to extend the moratorium period, providing additional flexibility.

Disadvantages of the Moratorium Period -

• Accumulation of Interest: Interest accrues during the moratorium period, leading to its accumulation and eventual payment.
• Compound Interest: Some institutions charge compound interest during the moratorium period, contributing to an increase in the total interest accrued.

Moratorium Periods from Different Lenders:

Public-Sector Banks: Typically, the moratorium period is the course duration plus 6 months, with no repayments required during this period.

Private-Sector Banks: Moratorium period is typically the course duration plus 12 months. However, borrowers may need to pay simple interest during this period, and installments start after the moratorium.

NBFCs: Moratorium period is generally the course duration plus 12 months. Similar to private banks, borrowers may need to pay simple interest or partial interest during the moratorium period.