The Moratorium Period: Managing Interest During the ‘Grace Period’ While Studying

The ‘moratorium’ and ‘grace’ period are two important concepts that you must understand when planning your Education Loan repayments. These refer to the two ‘breaks’ you get before your EMIs are due. However, these aren’t always necessarily ‘interest-free’ breaks. Hence, it is important to learn about their specifics to avoid any surprises down the line.

So, let’s understand how the moratorium and grace period work in an Education Loan, and how you can manage your interest while focusing on your academics.

Understanding the Difference Between Moratorium and Grace Periods

Being aware of the difference between the two concepts is the first step in understanding how to handle interest during these periods:

• Moratorium period: Also known as a ‘loan repayment holiday’, the Education Loan moratorium period is a short-term suspension during which loan payments are deferred to the future. As such, there are no obligations to make monthly payments.
• Grace period: This is an extension that begins once the moratorium period ends. Typically shorter than the moratorium period, the student loan grace period is intended to be utilised to find a job after your education and stabilise your finances.

Also Read: US Visa Rules Affect Student Loan Companies: Impact on Indian Lenders and Students

How Does Interest Work With Moratorium and Grace Period?

A crucial element of the moratorium and grace period is that, while you are not obligated to make monthly payments, interest still adds up on your loan amount. This accumulated amount, at the end of the grace period, is treated as an additional sum to be repaid for your Education Loan.

These are the two broad ways in which the lender may levy interest on your Education Loan:

• Simple interest: Here, interest is accumulated only on the principal amount. You can repay this interest separately or combine it with the principal amount at the end of the moratorium and grace periods.
• Compound interest: Lenders may also use compound interest, which is calculated on top of the principal and the previously accrued interest amount. This interest model increases the total repayment amount at the end of the loan tenure.

Five Steps to Manage Interest During Grace Period

Accrued interest can be partially or entirely repaid during the grace period. Thus, careful planning during this time can reduce your total interest burden and make EMI payments more comfortable. Follow these five steps to manage interest better during the grace period:

• Monitor your interest accumulation: Regularly checking your loan statements helps you understand how much interest is being added over time. This awareness allows you to plan partial payments or adjust your finances.
• Start repayments early: Repaying as much of your interest as you can during the grace period can prevent it from piling up. This reduces the unpaid interest that may later be added to your principal, making your future EMIs more manageable.
• Make prepayments where possible: Prepayments directly cover the principal amount and can be made to reduce the principal upon which interest is accrued.
• Set aside an emergency fund: Having an emergency fund ensures that interest payments continue even during unexpected situations, like delays in getting a job after graduation.
• Refinance or restructure if necessary: Refinancing your loan by switching to a different lender with better terms can help keep your interest costs in check. Alternatively, you can explore restructuring your loan with your existing lender by increasing the repayment tenure to lower your EMIs, extending the moratorium period, or gaining interest concessions.

Also Read: Understanding How Education Loan Works: Types, Benefits, and Process

To Conclude

The moratorium and grace period offer valuable breathing space during your educational journey. However, the interest on your loan keeps accruing in the background, so understanding how it accumulates is essential to maintain your long-term financial health. By planning your finances while studying, you can significantly reduce your financial burden.

Explore Poonawalla Fincorp’s Education Loan to access competitive interest rates, transparent terms, and repayment options that align with your academic journey.

FAQs

Do education loans accrue interest while in the grace period?

Yes, while it depends on the terms of the specific lender, an Education Loan typically does accrue interest during the grace period.

What is the typical moratorium period for an Education Loan?

Most lenders offer a moratorium covering the course duration plus 6 to 12 months after course completion, or until you get a job, as per the scheme terms.

Do I have to pay anything during the moratorium period?

While there are no obligations to pay EMIs during the moratorium period, it is advisable to pay the interest accrued on the principal amount if possible to avoid higher monthly repayments in the future.

Can I start repaying my Education Loan before the moratorium ends?

Typically yes. You can start making repayments towards your interest or principal before the moratorium ends, to reduce your interest accumulation and help close the loan faster.

Does repaying interest during the grace period affect my credit score?

No, repaying interest during the moratorium or the grace period does not directly affect your credit score. However, it can set you up for easier monthly payments in the future, preparing the foundation for a healthy credit profile.