What is the moratorium period for an education loan?

  1. What is the moratorium meaning in banking?
  2. What benefits of a moratorium period in education loans?
  3. How does repayment work in the education loan period?
  4. Why is an education loan calculator with a moratorium period important?
  5. Difference between a moratorium period and a grace period?
  6. Frequently asked questions

With the increasing costs of education, students and parents find themselves compelled to resort to education loans for financial support. For those aspiring to pursue quality education in esteemed universities, the expenses can further rise. Consequently, students and their families often seek financial assistance from banks. 

To accommodate the repayment responsibility falling on students, banks typically provide a grace period during which the students are not required to make repayments. This timeframe is referred to as the moratorium period in education loans. This article will comprehensively explore the various aspects of the moratorium period in education loans and highlight the benefits it offers.

What is the moratorium meaning in banking?

In simple terms, a moratorium period in an education loan signifies a pause in the repayment schedule, allowing the borrower to delay payments to the bank or lender.

This implies that students are not obligated to commence repaying their education loan immediately after receiving funds from lenders. Thanks to the moratorium period, students can initiate interest and Equated Monthly Installment (EMI) payments only after successfully completing their course.

Furthermore, students have the option to extend this education loan moratorium period up to 6-12 months after finishing the course. Many lenders offer students flexibility in this regard, allowing them to start repaying immediately or after 2-3 months, 6 months, 8-9 months, or even 12 months if they encounter difficulty securing employment following their course completion. This extension offers students much-needed breathing space, alleviating the stress and concerns associated with education loan repayments.

What benefits of a moratorium period in education loans?

In the absence of moratorium periods, meaning banks traditionally demanded immediate education loan repayments upon course completion, often leaving students burdened with debt and necessitating part-time employment to meet payment obligations.

Relieved Monthly EMI Payments:

The moratorium period, spanning the course duration plus an additional 6 months, and sometimes up to 1 year, eases the financial load on students. During this time, students are exempt from monthly Equated Monthly Installments (EMIs), providing a valuable one-year break from financial obligations and potential education loan default.

Credit Score Preservation:

Students enjoy the advantage of an unaffected credit score during the moratorium period. Timely repayments, when resumed, can even contribute to building a positive Credit Information Bureau (CIBIL) score.

Penalty-Free Non-Payment:

Importantly, banks refrain from imposing penalties for non-payment throughout the moratorium period. This policy grants students the financial flexibility to navigate their post-education transition without incurring additional charges.

Choosing an education loan moratorium provides students with the financial flexibility needed to pursue their studies without immediate repayment pressures, contributing to a more seamless educational journey.

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How does repayment work in the education loan time period?

During the moratorium period, students are not mandated to make Equated Monthly Installments (EMIs), but it’s crucial to note that interest continues to accrue, contributing to the overall burden. 

Initiating repayment sooner holds the key to minimizing the total interest paid on the loan. Banks recognize the diverse preferences of borrowers regarding repayment and offer various options:

Simple Interest: Students opting for this approach continue paying simple interest throughout their study period. The key distinction is that the simple interest does not augment the principal amount. Consequently, the EMI comprises only the principal amount plus compound interest.

Partial Simple Interest: In this option, students pay only a designated portion of the simple interest, allowing the remaining interest to be added to the principal amount. Subsequently, compound interest is charged on both the principal amount and the remaining simple interest.

EMI (Equated Monthly Installments): Under the EMI structure, students are not obligated to make any payments until the moratorium period concludes. Loan repayments are then structured in EMIs, with compound interest charged on both the principal amount and the accrued simple interest.

Why is an education loan calculator with a moratorium period important?

An education loan calculator, specifically designed for the moratorium period, serves as a financial tool, enabling borrowers to assess the moratorium’s impact on their loan. Users can input details such as the loan amount, interest rate, and moratorium period duration. 

The calculator then generates projections of the accrued interest during the moratorium, offering insights into the potential increase in the overall loan amount. This tool proves valuable for financial planning, aiding borrowers in making informed decisions about repayments post-moratorium. It essentially provides a roadmap for expediting the repayment of education loans.

An illustrative example of how an education loan moratorium period works:

To grasp the concept and significance of a moratorium period, let’s delve into an example that exemplifies its typical application.

Let’s consider ‘A,’ who secured a $500,000 loan from XYZ Bank in January 2024 to expand their business. As a condition for loan approval, ‘A’ committed to making fixed monthly installments of $100,000 over a 6-month period. The initial payment was slated for February 2024, with subsequent payments due at the start of each subsequent month.

Unfortunately, in mid-March 2024, unforeseen circumstances compelled ‘A’ to close their business. Acknowledging the situation, XYZ Bank extended a moratorium period to ‘A’ from mid-March 2024 until June 2024 without imposing any additional charges. Consequently, ‘A’ can postpone their payments, originally scheduled from April 2022 to July 2024.

Difference between a moratorium period and a grace period?

Moratorium PeriodGrace Period
DefinitionA duration when the lender permits you to halt payments.The period after a payment due date allows penalty-free payment.
LengthLonger than the grace period.Typically shorter compared to the moratorium period.
Automatic OfferNot necessarily offered automatically.If offered, extended automatically to all customers.
Interest ChargesInterest may be charged during this period.No interest is charged if payment is made within this timeframe.

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Frequently asked questions: 

What is a moratorium?

A moratorium is a distinctive timeframe in which a borrower is authorized to briefly suspend or generally reduce payments on a loan, usually due to financial hardships or unexpected situations.

Can I defer the repayment of my education loan in the moratorium period?

The period of the moratorium duration varies depending on the lender and loan type, generally ranging from 6 months to 1 year after course completion. It’s not standardized for all borrowers and hinges on factors like course duration, repayment capacity, and the borrower’s credit score rating.

Does the moratorium include both interest and principal components of the loan?

Yes, the moratorium encompasses both the interest and principal components of your Equated Monthly Installment (EMI).

Is the interest waived off during the moratorium period?

No, the loan’s interest component is not waived at some point in the moratorium. It accumulates and is added to subsequent EMIs once the moratorium period concludes.

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