There are a lot of things I don’t understand.
For instance, why NFTs are being sold for millions of dollars these days, the relevance of CrossFit and why I was given the day off on St Patrick’s Day.
Someone once said, “It’s okay to not know new things but it is never okay to not learn new things.
The path to overseas education is fraught with a number of obstacles and complex nomenclature. While doing their research, study abroad aspirants may have come across words like – “baccalaureate”, “bursary” and “moratorium”.
Though they sound scary, more often than not, they are used to describe simple things.
I write blogs with the sole purpose of educating my readers with all the aspects involved in higher education abroad. Today, I’ve decided to write about “Moratorium Period In Education Loan” as it is one of the most crucial factors in securing an education loan.
So sit back and relax, and soak in all the information related to Moratorium Period In Education Loan, replete with details on what is a moratorium period, how it works and why it is important.
What Is A Moratorium Period For Education Loan?
In the simplest words, a moratorium period is a break in the repayment period of the loan by the borrower to the lender.
What this means is that students do not have to start their education loan repayment immediately after the disbursement of funds from lenders. Thanks to the moratorium periods, students can begin their interest and EMI repayments after they have completed their course successfully.
Sounds awesome, right?
But wait, there’s more!
In addition to this, students can avail an extension of six more months of this education loan moratorium period if they are unable to find employment post their course period. This provides students with some much needed breathing space, as education loan repayments come with a lot of stress and worry.
Understanding Moratorium Period With An Example:
To understand the concept and purpose of a moratorium period, let’s consider an illustrative example that highlights its general application.
Suppose ‘A’ obtained a loan of $500,000 from XYZ Bank in January 2022 to expand their business. ‘A’ agreed to make fixed monthly installments of $100,000 over a span of 6 months as a condition to secure the loan. The first payment was scheduled for February 2022, with subsequent payments due at the beginning of each following month.
Unfortunately, in mid-March 2022, ‘A’ faced unforeseen circumstances that forced the closure of their business. Recognising the situation, XYZ Bank offered ‘A’ a moratorium period from mid-March 2022 until June 2022 without any additional charges. As a result, ‘A’ can defer their payment that was originally due in April 2022 to July 2022.
How Is The Moratorium Period Different From The Grace Period?
There is often confusion between the terms “moratorium period” and “grace period.” It is important to understand that a grace period refers to a specific duration after a payment is due, during which the payment can be made without incurring any penalties. In other words, the borrower is expected to make the payment within the grace period, or else they may face financial penalties.
On the contrary, during a moratorium period, the borrower is not required to make any payments. The duration of a moratorium period can vary from weeks to months, offering a more extended time frame compared to the typically shorter grace period of around 15 days.
How Does The Education Loan Moratorium Period Work?
One of the main features about the Moratorium Period is that it is exclusive only to education loans. No other form of loans provide borrowers with a Moratorium Period. Moreover, the concept of moratorium period is applicable only to education loans from government banks in India.
In order to understand the Moratorium Period Education Loan, we need to first grasp the two different types of education loan in India.
Secured Education Loan
A secured education loan is given on the basis of collateral. This means that a student is required to pledge any asset as collateral against their education loan. Secured education loans are provided by all leading government banks in India. The biggest ‘pro’ of a secured education loan from a government bank is the moratorium period. This moratorium period allows students to find employment and begin their education loan repayment only when they are settled financially.
Unsecured Education Loan
The complete opposite of a secured loan is an unsecured education loan. An unsecured education loan is essentially an education loan without collateral. They are primarily lent by private financial companies called NBFCs (Non-Banking Finance Companies) and a few other private banks. It is important to note that NBFCs and private banks do not offer the benefits of a moratorium period to the loan applicants.
How Does Repayment Work?
During the moratorium period, students are exempted from paying EMIs (Equated Monthly Installments), but the interest continues to accumulate, which increases the overall burden. Hence, initiating loan repayment at an earlier stage results in a reduced total interest paid on the loan. Recognising that borrowers have varying preferences regarding loan repayment, banks offer different repayment options. The available options are as follows:
Simple Interest: In this scenario, the student is responsible for paying the simple interest throughout their study period. As a result, the simple interest is not added to the principal amount, and the equated monthly installment (EMI) consists only of the principal amount plus compound interest.
Partial Simple Interest: In this case, the student pays a portion of the simple interest while the remaining interest gets added to the principal amount. Consequently, the compound interest is calculated based on both the principal amount and the remaining simple interest.
EMI: In this situation, the student is not required to make any payments until the moratorium period concludes. Subsequently, the loan repayments are structured in equated monthly installments (EMIs), and the compound interest is calculated based on the principal amount along with the accumulated simple interest.
Benefits Of Moratorium Period In Education Loan
Before Moratorium Periods were even a thing, banks would start asking students to repay their education loans as soon as their course ended without even having a job in hand. This led to a lot of student debt accumulation and as a result, students were forced to take up a part-time job in an effort to pay off their loans.
The emergence of a moratorium period in education loans has given students some time off from their liabilities for 1-year after the course ends. It also lets them find a job that can support them and help them pay off their liabilities.
Let’s look at an example of an SBI Education Loan Moratorium Period –
If a loan amount of Rs 1,00,000 is released at the start and interest rate is 10% per annum, a total interest of Rs 10,000 per annum or Rs 30,000 for a three-year moratorium period will be accumulated.
Now, the actual education loan repayment process begins only after the moratorium period is over. Students are allowed to make the remaining repayment in easy monthly instalments.
What Are The Disadvantages Of The Moratorium Period?
Accumulation of interest: During the moratorium period, the interest on the loan is not waived off. Instead, it gets deferred, resulting in its accumulation. As a result, the student is required to pay the accumulated interest at a later stage.
Increase in loan tenure: Since no repayment is made during the moratorium period, the loan tenure may slightly increase. The extended duration can impact the overall duration of loan repayment.
Compound interest during the moratorium: Certain financial institutions charge simple interest during the period of study and compound interest during the moratorium period. This can lead to an increase in the total interest accrued on the loan, making it costlier for the borrower in the long run.
Do NBFCs Offer A Moratorium Period On Education Loans?
Non-Banking Financial Companies (NBFCs) provide education loans with a moratorium period ranging from 6 to 12 months, along with varying payment terms. Unlike public banks, NBFCs typically require students to start repaying the interest during the moratorium period. Additionally, NBFCs may offer options for partial interest repayment, subject to specific policy conditions.
It is important to note that NBFCs operate under their own framework for sanctioning education loans and are not bound by the regulations of the Reserve Bank of India (RBI). Consequently, the conditions governing the grace period offered by NBFCs may differ slightly. For instance, individuals who opt for an unsecured education loan from an NBFC are generally expected to commence the repayment of interest immediately after the first disbursement of the loan.
What Is The Moratorium Period Offered By Different Lenders In India?
The moratorium period varies among different types of lenders and can even differ within the same category. Here are the moratorium periods offered by different lenders:
Public-sector Banks: Typically, the moratorium period in government banks is equal to the course duration plus 6 months. During this period, students are not required to make any payments.
Private-sector Banks: In private banks, the moratorium period is generally equal to the course duration plus 12 months. However, the borrower is expected to pay a simple interest amount during the moratorium period. The repayment of installments, including a portion of the principal amount, begins after the moratorium period.
NBFCs: Generally, the moratorium period in NBFCs is equal to the course duration plus 12 months. Similar to private banks, the borrower is usually required to pay a simple interest amount or a partial interest (determined and communicated during the loan application process) during this moratorium period. The repayment of installments, which includes a portion of the principal amount, starts after the moratorium period.
Why Is The Moratorium Period Important In Student Loans?
The moratorium period, as per banking regulations, ensures that individuals who do not make repayments during this period are not classified as loan defaulters. During the moratorium period, simple interest is computed solely on the disbursed amount, excluding margin money.
A considerable number of Indian students pursue higher studies abroad and often rely on education loans for financial support. To allow these students a period of undisturbed study and job search, providing a moratorium period on education loans is crucial.
Conclusion
There’s no doubt that a Moratorium Period in an education loan is a boon for students. However, students should not be lax with their repayments, just because they have some time off from paying their debts. Even though students are not required to pay EMIs till the moratorium period is on, the interest still accrues and adds to the burden. The best way to make use of the grace period is to start paying the EMIs before the period ends.
And that’s the end of our Guide To Education Loan Moratorium Period! Hope you now know everything related to what is a moratorium period.
FAQs
- Is moratorium permanent?
A moratorium refers to the temporary suspension of an activity or law, with the intention of lifting the suspension in the future when certain conditions or issues have been addressed and resolved. It serves as a pause or delay, allowing for further consideration and evaluation before resuming the activity or enforcing the law.
- What happens after the moratorium ends?
So, once your EMI holiday ends, you’ll need to start making your EMIs again. This means you’ll have to pay both the interest that has built up during the moratorium period and the principal amount.
- Can the moratorium be cancelled?
The Moratorium period cannot be cancelled once you’ve opted for it.
- Can I increase the moratorium period?
Yes, it can be increased up to two years.
- Can I pay the principal during the moratorium period?
The moratorium period is a term specifically linked to education loans, and it’s important for student borrowers to familiarize themselves with it beforehand. In financial terms, the moratorium period for education loans refers to the duration provided by the lender during which students are not obligated to make principal repayments on their education loan.
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