Education loans are specialized credit products which are aimed at covering the living expenses, tuition and other expenditures of gaining higher education. The awareness about the Education Loan EMI mechanism, moratorium rule, subsidy, and tax treatment helps the students and families to plan both borrowing and repayment better.
What is an Education Loan EMI?
An EMI (Equated Monthly Installment) refers to the fixed amount you will pay to a lender after the beginning of the repayment period of an education loan. Education loans often have a moratorium period, or the time frame over which a person does not pay back the loan, unlike some consumer loans.
Moratorium Period
Most education loans come with a moratorium period of the course and 6-12 months post course completion. But in the meantime the interest may also be accruing.
The most Important Factors that influence your Education Loan EMI
Loan Amount
Tuition + approved living expenses + approved add-ons (books, travel, laptop).
Interest Rate
Small fluctuations accumulate during long durations of time; they may be fixed or floating.
Loan Tenure
Normal tenures are between five and fifteen years depending on the lender and amount.
Moratorium Period
Interest can accrue during a moratorium; it has to be capitalized
Collateral/Security
The bigger amounts may be secured either by collateral, which may influence an approval and interest rate.
Co-applicant
Parents apply together with the parents; the credit history of the parents influences the rate and eligibility.
Calculation of EMI Education Loan
The interest rate formula applied by lenders:
Practical Example
Education Loans and their features
Domestic Education Loans
- For studies within the country
- Simpler documentation
- Lower processing time
- Generally lower interest rates
International Education Loans
- For studies abroad
- Higher loan amounts available
- Different collateral norms
- Foreign exchange considerations
Secured vs Unsecured
Secured Loans
- Require collateral (property, FDs)
- Higher amounts at lower rates
- Longer tenures available
Unsecured Loans
- No collateral required
- Lower loan limits
- Higher interest rates
Moratorium: Its Nature and Impact on Cost
Moratorium Normally encompasses the period of study and some grace period (usually six months) after completion before regular EMIs begin.
Interest Accrual
When repayment is moratorialized, lenders can still permit the suspension of it; but interest can still be accumulated.
Capitalization
The amount of capitalized, or added to principal accrued interest will increase your post-moratorium EMI.
Subsidy Options
Some programs exempt or lower interest on some borrowers on a moratorium basis.
Proactive Payment
Pay interest during the moratorium to avoid capitalization and to reduce the total costs, where at all possible.
Important Tip
Ask your lender in writing whether interest should be capitalized, waived or serviced during the moratorium.
Tax Benefits (India-specific)
Under the Income Tax Act, Section 80E , the interest on an education loan will attract deduction under the income tax in India.
Interest Deduction
Repayment of interest is deductible only and not principal.
Deduction Period
The maximum number of years available is 8 years since the year of repayment.
Eligible Borrowers
Self-spouse, child or legal guardian loans.
Important Note
Tax legislation is dynamic. This is done by consulting the tax department or an authorized tax professional to ensure that there are no current laws or procedures to claim.
Documents & Eligibility
Essential Documents
- Completed loan application form
- Passport-size photos
- Identity evidence (Aadhaar, passport, driving license)
- Address proof
Academic Documents
- Admission letter / offer letter
- Fee structure / tuition invoice
- Academic records (marksheets, certificates)
- Cost breakup for living expenses
Financial Documents
- Proof of co-applicant income
- Salary slips, income tax returns
- Bank statements
- Collateral documents (if required)
Eligibility Criteria
This is largely based on the academic history of the borrower, the profile of co-applicant credit, type of course and the reputation of the institute. There might be lenders who have lists of approved institutions where one may take foreign loans.
How to Optimize and Reduce Interest Cost
Compare Lenders
run values of the total cost. Other variables are interest rates, processing fees, moratorium policies and foreclosure charges.
Negotiate Fees
Processing costs are often negotiable especially where dealing with banks with whom you are familiar.
Interest During Moratorium
Reduces the long-term interest payment to a significant degree and does not lead to capitalization.
Use Scholarships
The amount of funds that will be funded will be reduced by application to part-time assistantships or scholarships.
Shorter Tenure
EMIs are more, yet the amount one pays the interest on throughout the loan tenure is much lower.
Refinance Later
Consider refinancing to the new lender that has a lower interest rate in case your credit or market rates have improved after the study.
Prepayment and Foreclosure Strategies
Prepayment
Benefits
- Making installments of unpaid principal
- Reduces EMI or tenure
- Lower total interest cost
Considerations
- Check prepayment windows
- Some lenders charge penalties
- Verify lock-in periods
Foreclosure
Benefits
- Pays off entire outstanding balance
- Highest interest savings
- Debt-free status
Considerations
- May incur foreclosure fees
- Compute net benefit before acting
- Check for any hidden charges
Frequently Asked Questions
The repayment is typically started after the moratorium which in most cases is the course period + a grace period (typically six months). The loan contract and the policy of your lender will define the exact starting date.
Usually, yes. Interest can either be added to the principal and capitalized (accrued) or due after the moratorium. In some cases, interest can be subsidized or at least programs, based on the eligibility of the students; make inquiries with your lender.
Indeed. Parents are also common guarantors or co-applicants. The rate of interest and granting loans is typically determined by their income and credit rating.
The real education loans are tax free. In India, however, Section 80E can permit the deduction of interest charged on student loans. Make sure you have checked the local tax laws of your jurisdiction.
Secured loans are secured by collateral (real estate, fixed deposits) and are usually allowed to be higher in amount and at reduced rates. They do not require security but unsecured loans are often more expensive in interest and lower limit.
Although most lenders do not allow prepayments on a moratorium, some do. In a study, prepayment of the principal or interest may significantly reduce the total costs provided such prepayments are allowed. Check terms with your lender.
The amount of loans differs depending on the lender and course. Loans of 4-20 lakhs are normally provided in domestic education, whereas those of international education may reach 1.5- 2 crores depending on the institution and collateral.
The moratorium is usually the time of the course and 6-12 months of the course. The moratorium may lead up to 5-7 years of study plus grace period in the case of longer courses such as a medical degree.
Call your lender as soon as possible. Various lenders have flexible repayment plans, EMI restructuring or longer moratorium on students with employment difficulties. Fail to make payments without notice to the lender.
Yes, there are lots of banks providing unsecured education loans up to 7.5lakhs without any security. Collateral or third party guarantor is normally required in amounts exceeding 7.5 lakhs, but policy differs between lenders.
Are You prepared to make EMI Payments on Education Loan?
Use our advanced EMI calculator which has elaborate amortization schedules, interest capitalization analysis and moratorium scenarios.
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