Moratorium Period In Education Loan - Meaning, Examples & Working

The moratorium period is when a borrower is exempted from repaying the loan. ‘Moratorium’ means temporary prohibition of an activity; hence, the moratorium period in education loans refers to the interval of time in which the borrower need not repay the loan. During this period, the banks do not demand any repayments from the students.  

The Reserve Bank of India has made it mandatory for all government banks to offer a moratorium period on education loans.

The moratorium, as a banking rule, follows that those who do not repay during the moratorium period must not be treated as loan defaulters. In the moratorium period, simple interest is calculated for the amount disbursed, excluding margin money.

A significant number of Indian students seek abroad for higher studies, and many of them rely on education loans for financial assistance. To provide these students a duration to study peacefully and search for a job, it is important to give a moratorium period on education loans.  

Understanding moratorium period with an example:

Understanding the concept and purpose of the moratorium period would be easy with an example. In this example, our objective is to learn the general moratorium period.

Let us suppose ‘A’ was given a $500,000 loan by XYZ Bank, in January 2022  to expand his business. ‘A’ agreed to pay fixed monthly installments of $100,000 over 6 months to secure the loan. The first payment will be due at the start of February 2022  and remaining  payments at the start of each following month.

However, in the middle of March 2022 , ‘A’s business was forced to close due to some unprecedented event. Keeping this in consideration, XYZ Bank decided to grant ‘A’ a moratorium period from mid-March 2022  to June 2022  with no additional charge. Thus, ‘A’ is now able to defer his payment due in April 2022  to July 2022.

Similarly, the lender knows that the student borrowers cannot repay the loan immediately after their studies. The students are therefore given a moratorium period to find a job and start their repayments after the moratorium period.

People commonly confuse moratorium period with a grace period. It is vital to know that a grace period is a set duration after payment is *outstanding, where a payment can be done without any penalty charged. In other words, a borrower is expected to pay over the grace period or face a monetary penalty.

On the other hand, in a moratorium period, a borrower doesn’t have to pay over the period. Also, a moratorium period length can vary from weeks to months, whereas a grace period length is generally 15 days. 

*Outstanding payment refers to the unpaid balance amount of the current due. 

Let’s  look at some of the advantages that the repayment holiday has: 

• A moratorium period reduces the financial burden on the student during the study.
• Allows the student for better repayment planning.
• The student’s credit score remains unaffected during this non-repayment period.
• The parents, who are the co-borrowers in most education loans, do not have to make any repayment during the moratorium period.
• Some banks offer an extension in the moratorium period.

Mentioned below are a few potential disadvantages of the moratorium period in education loans:

1. Accumulation of interest: The interest is not waived off during this period and rather gets deferred. So, it essentially gets accumulated and the student has to pay it at a later stage.
    
2. Increasing in loan tenure: Since there is no repayment during the grace period, the loan tenure might increase marginally.
    
3. Compound interest during the moratorium: Some financial institutions charge simple interest during the period of study and compound interest  during the moratorium period, thus leading to an increase in the total interest accrued. 

NBFCs do offer a moratorium period of 6-12 months in education loans with differing payment conditions. Unlike public banks, NBFCs require the students to repay the interest during the moratorium period. The NBFCs also allow for a partial interest repayment with different policy conditions.

NBFCs are not governed by the rules of RBI and have their own framework for sanctioning education loans. As such, the conditions governing their grace period too are slightly different. Those who take an unsecured education loan from an NBFC have to start repayment of interest immediately after the first disbursement of the education loan. 

Moratorium period differs from different types of lenders.Sometimes it can also vary within the same type of lender too. Moratorium periods of different lenders are:

1. Public-sector Banks: Usually the moratorium period in government banks is course period + 6 months. Students do not have to do any type of payments during this  period.
    
2. Private-sector Banks: The moratorium period in private banks is usually course period + 12 months. However, the borrower has to pay a simple interest amount during the moratorium period. Installments, including some part of the principal amount, start after the moratorium period.
    
3. NBFCs: In general, the moratorium period in NBFCs is course period + 12 months. However, the borrower has to pay a simple interest amount or some partial interest (set and communicated during the loan process) during this moratorium period. Installments including some part of the principal amount starts after the moratorium period.

Students who wish to take an education loan for their higher studies can contact GyanDhan - India’s first education financing marketplace. Know more about the moratorium period and everything related to an education loan for abroad studies.