Moratorium Period in Education Loan

If you are one of those students who are wondering what is a moratorium period for education loans? why is it important? how is it beneficial for students? Then do not worry! This article will answer all your doubts regarding the moratorium period as it aims to highlight how the concept of the moratorium period is very crucial to the abroad education loan process, especially those from government banks.

For those who are new to the concept of a moratorium period, here is a short definition, "a moratorium period is defined as a gap in the repayment tenure of the loan where students are not obliged to pay the loan EMIs during the period. The moratorium period consists of your course duration plus 6-12 months." 

While public-sector banks allow you to pay nothing during the moratorium period, private lenders require you to pay either partial or full interest during the period. 

Before we try and understand the entire concept of a moratorium period with respect to education loans, here is a sneak peek into the different types of education loans available in India for higher education as it has their own relevance with regards to moratorium period.

In the abroad student loan process, education loans are categorized into two different types based on the requirement of collateral securities. In order to borrow an education loan in India, it is essential to have sufficient information on both types of abroad education loans. We've already written in-depth articles on both types of education loans which you can read by clicking on the type of loan given below-

Secured education loans - These loans are lent by all prominent government banks in India. One of the biggest benefits of secured education loans borrowed from government banks is the moratorium period granted to all students before the repayment period begins. 

Unsecured Education Loan - These loans do not require any form of collateral. They are mainly lent by private banks and NBFCs (Non-Banking Finance Companies). Government banks lend unsecured education loans of only up to Rs.7.5 Lakhs. Unlike government banks, private lenders do not offer the benefits of a moratorium period to the students.

According to the RBI (Reserve Bank of India), students from all social backgrounds were to be granted an education loan. Keeping in mind the financial restrictions of meritorious students who wished to study abroad, the RBI prepared a model educational loan scheme.

Under this model, the students were to be granted a moratorium before their repayment starts. All government banks have an obligation to grant a payment-free moratorium period to the students. 

It is important to note that this moratorium period is not interest-free. Simple interest is charged by banks for the entire duration. students are expected to repay this interest in addition to the educational loan amount in the form of easy monthly installments.

For example, if a loan amount of Rs 1 lakh is taken by a student at the start and the interest rate is 10% per annum, a total interest of Rs 10,000 per annum or Rs 30,000 for a three-year moratorium period will be accumulated. Similarly, the more amount you disburse during your moratorium period, their interests will accordingly be calculated and will be accumulated with the principal amount.

• Students can focus on their studies without worrying about the payments towards their education loans. 
• It reduces students' financial stress and gives them breathing space to plan their finances better.
• During this period, students can save funds for subsequent EMIs or pay for other expenses.
• If you avail moratorium, it will not be considered a default. So, your credit score won’t get affected.
• Government banks will not charge any penalty for availing of moratoriums.

A moratorium period is frequently confused with a grace period. It is critical to understand that a grace period is a predetermined period after payment is past due during which a payment can be made without penalty. In other words, a borrower must pay within the grace period or risk financial penalties. A borrower, on the other hand, does not have to pay during a moratorium period. A moratorium period might last anywhere from weeks to months, whereas a grace period usually lasts 15 days.

While the moratorium period provided by the Government banks doesn't mandate students to pay anything during this period, the moratorium period offered by private lenders requires students to pay either partial or full interest during the period.

Although all financial institutions in India are governed by the RBI, private lenders have their own framework of operating. While their way of operating is loosely based on the directions of the RBI, private lenders have customized ways of processing an education loan. Here’s a brief take on how NBFCs handle education loan repayment.

Private lenders (private banks and NBFCs) offer a moratorium period on education loan repayment like government banks do. However, unlike government banks, this period is not payment-free.

As already mentioned private lenders require students to make their interest payments during the moratorium period. The good news is that these lenders accept partial payments of interest during the moratorium period.

Partial payment is when students are allowed to partially pay the interest charged during the moratorium period. This means that if you are being charged a monthly interest of Rs.10,000 per month during your moratorium period and you are unable to do so, private banks and NBFCs allow you to pay only Rs.4000 to Rs.5000, depending on their policies.  

Depending on the profile, private banks and NBFCs may even ask for full payment of interest during the moratorium period. This clause is entirely up to their education loan repayment rules. 

The WeMakeScholars team is closely associated with prominent private banks and NBFCs. If you are looking for a concession in your unsecured education loan interest rates, or to negotiate the repayment terms, do not hesitate to contact our team for assistance. You get to avail of an automatic 0.5% reduction in your loan interest rates when you apply through us. request a callback today to know more about other details.