Moratorium Period In Education Loan - Meaning, Examples & Working

The phrase moratorium period is defined as the period during which a borrower is exempted from repaying the loan. This repayment holiday is applicable to education loans. During this period, the borrower does not have to make any repayments to the banks. 

The Reserve Bank of India, the apex body that governs the banks of India, has made it mandatory for all government bank education loan schemes to offer a moratorium or grace period on loan repayment. 

An education loan, like other kinds of loans, is given at a rate of interest. This interest is accrued from the first month after the sanction of the education loan. However, government banks have to give a repayment holiday to the borrowers on an education loan. This means that students do not have to repay the interest during the specified moratorium period. It should be remembered that this interest does not get waived off during the moratorium period but rather deferred. Students will pay this accrued interest (that is divided equally) when their loan repayment starts. 
Though the terms and conditions vary from bank to bank, most financial institutions provide a moratorium period of 1 year from the completion of the program. 

Let us look at some of the advantages that the repayment holiday has. 

1. This reduces the financial burden on the student during the course of the study. 
2. Since the bank does not charge any penalty on non-repayment during this grace period, the student can concentrate on their studies without any financial worries. Post the completion of the program, they can dedicate their attention towards finding a suitable job within a year of graduating without any worries of loan repayment for a year. 
3. The student’s credit score remains unaffected during this non-repayment period. 
4. The parents, who are the co-borrowers in most education loans, do not have to make any repayment during the moratorium period.

Just like every coin has two sides, the moratorium period on education loans also has its advantages and disadvantages. Let us list down a few disadvantages to it so that our readers can make an informed decision.

1. As mentioned earlier, 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. Since there is no repayment during the grace period, the loan tenure might increase marginally. 
3. Some financial institutions charge simple interest during the period of study and compound the rate of interest during the moratorium period, thus leading to an increase in the total interest accrued

You can check out this blog to understand how repayment and non-repayment during the moratorium period will affect the total amount that has to be paid to the bank. 

Even though the moratorium period is an excellent feature of an education loan for students who have financial constraints, the best way to overcome the disadvantages associated with it is to start repayment as early as possible - possibly during the period of study with the help of a part-time job such as Assistantship, etc. 

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. However, a few NBFCs allow borrowers to make partial repayment in case they are unable to make the complete repayment each month during the moratorium period. For example, a borrower who has to make a monthly repayment of 20000 can make partial repayment of 10000 too during the moratorium period. 

Moratorium period differs from lender to lender. We can broadly segment the moratorium periods on the basis of the types of lenders. However, it can vary amount the same type of lenders in a few cases. Moratorium periods of different lenders are:

• 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 moratorium period. 
• Private-sector Banks: The moratorium period in private banks is usually course period + 12 months. However, borrower has to pay a simple interest amount during this moratorium period. Instalments including some part of the principal amount starts after the moratorium period 
• NBFCs - In general, the moratorium period in NBFCs is course period + 12 months. However, 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.

Education loan applicants are constantly in a dilemma about this specific clause. The overseas education loan moratorium period came into being with the aim of providing a fair chance to financially weaker, meritorious students to arrange for finances to make the education loan repayment without a lot of hassles.
However, it is important to note that this duration is not interest-free. Therefore, the earlier a student starts the repayment of loan, the lesser will be the interest charged on the rest of the education loan amount. 

Students who wish to take an education loan for their higher studies can contact GyanDhan - India’s first education financing marketplace and not only get to know more about the moratorium period but also get the best education loans and that too for free.