Education Loan Moratorium: Should You Pay Interest While Studying?
Interest keeps running during the course and grace period. Paying it as you go can save lakhs. A worked example on a ₹10 lakh education loan.
Education loans in India usually come with a moratorium — a period covering the course plus a grace period (often 6–12 months) during which you do not have to pay EMIs. It is easy to read this as “interest-free”. It is not. Interest normally keeps running, and what you do with it can change your total cost by lakhs.
Key takeaways
- On a ₹10 lakh loan at 10%, four years of unpaid simple interest adds ₹4 lakh to the balance.
- Paying the interest (about ₹8,333 a month) during the moratorium cuts the later EMI from ₹23,242 to ₹16,601.
- Total outflow falls by about ₹1.58 lakh — and more if your lender compounds moratorium interest.
What happens during the moratorium
During the moratorium, interest accrues on the amount disbursed. Many banks charge simple interest during this period; at the end, the accrued interest is usually added to the principal, and EMIs are calculated on the larger amount. Some lenders compound the interest, which makes the balance grow even faster. Check your sanction letter for the exact method.
A worked example
Assume a ₹10,00,000 loan at 10%, with a 4-year moratorium and a 7-year repayment period. For simplicity, we assume the full amount is disbursed at the start and simple interest applies during the moratorium.
Option A: Pay nothing until EMIs start
- Interest accrued over 4 years: ₹4,00,000
- Balance when EMIs begin: ₹14,00,000
- EMI for 7 years: ₹23,242
- Interest during repayment: ₹5,52,299
- Total paid: ₹19,52,299
Option B: Pay the interest during the moratorium
- Monthly interest payment while studying: about ₹8,333 (₹4,00,000 over 4 years)
- Balance when EMIs begin: ₹10,00,000
- EMI for 7 years: ₹16,601
- Interest during repayment: ₹3,94,499
- Total paid: ₹17,94,499
Option B saves about ₹1,57,800 in total and lowers the EMI by more than ₹6,600 a month at the start of your career — when your salary is usually at its lowest.
In practice, education loans are often disbursed in instalments (semester by semester), so interest accrues on a smaller amount in the early years. The exact figures will be lower than this example, but the principle is the same.
If paying full interest is not possible
- Pay what you can. Even partial interest payments reduce the amount added to your principal.
- Ask about interest subsidies. Government schemes may cover moratorium interest for eligible students.
- Prepay early in the repayment phase. Bonuses and early salary increases are most valuable at the start of the loan.
Tax benefit on education loan interest
Under Section 80E, interest paid on an education loan for higher studies can be deducted from taxable income, with no upper limit, for up to 8 years from the year repayment starts. This deduction is available under the old tax regime. Tax rules change, so confirm the current position before you file.
Plan your repayment
Use the Education Loan EMI Calculator with the balance you expect to owe when EMIs begin — including any interest added during the moratorium. Then try a smaller balance to see how much paying interest early would save you.
This article is for general information only and is not financial, tax or legal advice. Rates, rules and products change — check current terms with your lender or a qualified adviser. Disclaimer.