Moratorium Period In Education Loan - Meaning, Examples & Working

    Updated on: 27 Sep 2022

     


    Are you thinking of taking an education loan and are confused by the term “moratorium period”? If yes, then fret not as this blog will take a detailed look at the term “moratorium period for education loan” and explain all the nitty-gritty that is related to it in the context of education loans. 

    With the cost of education seeing an upwards trend, education loans have come as the much-needed impetus for students who wish to pursue higher studies but have financial constraints. In recent years, even students who could finance their higher education on their own, choose to take an education loan. This is because an education loan can also help you keep your personal savings for contingencies and even helps you get tax benefits and build your CIBIL score. 

    Taking an education loan too has become much easier these days, especially if the college and program is a reputed one. Financial institutions such as public sector banks, private banks, and NBFCs too have become more open and are sanctioning education loans for a growing number of programs and courses from all over the world. Given the multiple benefits of education loans, it is no wonder then that an increasing number of students are opting for these for higher education, especially when going abroad for higher studies. However, one common doubt that many first-time student borrowers have is regarding the moratorium period, so let us then jump into the discussion without beating around the bush. 

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    What is the Moratorium Period For Education Loans?

    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. 

    Understanding moratorium period with an example

    Let us suppose ‘A’ was given a $500,000 loan by XYZ Bank, in January 2021 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 2021 and following payments at the start of each following month.
    However, in the middle of March 2021, ‘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 2021 to June 2021 with no additional charge. Thus, ‘A’ is now able to defer his payment due in April 2021 to July 2021.

    What is the Difference Moratorium Period and Grace 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 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. 

    What are the Advantages of a Moratorium Period in an Education Loan?

    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.

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    Are There Any Disadvantages of 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. 

    Do NBFCs offer a moratorium period on education loans? 

    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. 

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    What are the Moratorium Period of Different Banks in India?

    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.

    Read Also:

    Do Government Banks Put Fines on Early Repayment During 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.  

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