InvestorQ : What is moratorium period? What does it have to do with an education loan?
Gauravi Patel made post

What is moratorium period? What does it have to do with an education loan?

seema Upadhyaya answered.
2 years ago

Investopedia defines moratorium as: A temporary suspension of an activity or a law until future events warrant lifting the suspension or issues regarding the activity have been resolved. A moratorium may be imposed by a government or by a business.

In context of an education loan, a moratorium period is the period during which the borrower is not expected to repay the loan amount. It is the waiting period before which repayment by way of EMIs begins. Normally, the repayment begins after the loan is disbursed and the payments have to be made each month. However due to this moratorium period, the payment starts after some time.

Education loans provide this feature. This is because education loans are repaid by the students after they start earning and build their finances. Consequently, there might be a time lag between them completing their studies and before getting a job. That is why a provision for moratorium period is made.

The most important feature of education loans is the structure of repayments. A student doesn’t have to make any loan repayments until he/she completes the course. During the moratorium period, on an education loan the bank will calculate interest on the loan on simple interest basis. Interest calculations will start as and when amounts are disbursed to you and not on the entire loan amount at once.

This interest will be accumulated until the end of the moratorium period. There are some banks that offer a concessional interest rate if the student takes the loan and arranges to pay the interest portion of the loan during the moratorium period.

Taking a simple example, if a loan amount of Rs 1 lakh is released at the start and interest rate is 11% per annum, a total interest of Rs 11,000 per annum or Rs 33,000 for a three-year moratorium period will be accumulated.

At the end of moratorium, Rs 1,33,000 will be the amount on the basis of which future interest and EMI will be calculated.

Please note, a student can also repay some interest during the study period to lower his/her EMIs. The bank starts levying interest from the time of disbursement at the end of each course year or semester. The amount keeps adding up, increasing the debt burden.

However, if the student pays simple interest on the principal during the study period, his/her EMIs will be reduced to a large extent. Many banks also give a 1 per cent interest concession to those who repay the interest debited during the moratorium period.