Education Loan Repayment Period & Rules Explained

Student loan repayment can add a financial burden to students without the right information. To be able to manage the repayment of education loans efficiently, it is vital to understand how to pay education loans, along with their terms and conditions.

In this article, you’ll learn everything you need to know about student loan repayments, moratorium periods, repayment tenure, and strategies to manage finances. This will reduce the stress and financial burden for you during the education loan repayment period. 

Below you can find the key terminologies used across the blog, which are essential to understand the education loan repayment process. 

• Moratorium - Period during which regular EMI repayment hasn't started. Course duration + 6/12 months after course completion. 
• Course Duration- Time spent studying 
• Repayment Tenure - Period over which EMIs are paid
• Total Loan Period - Moratorium + repayment period (where applicable) 

What are EMIs? 

EMI stands for Equated Monthly Instalments. It is a pre-decided amount that the borrower agrees to pay every month on a set date. EMIs are calculated based on 3 factors: Loan amount, agreed interest rate, and repayment tenure. EMI consists of the cumulative interest and principal amount that will clear your loan.

For the education loan repayment period, you can calculate the EMI amount with the help of the mathematical formula: 
EMI = [P × R × (1+R)^N] / [(1+R)^N – 1], where P is the principal loan amount, R is the monthly interest rate, and N is the total number of monthly instalments.

What is a Moratorium Period?

The moratorium period is a repayment holiday during which the student’s loan repayment doesn’t start. The moratorium period for an education loan is typically the course duration plus 6 to 12 months. During this period, repayment of the loan, i.e., the EMIs, does not start. This provides financial relief for students and their families while studying. Different lenders and loan products can have different treatment of interest during the moratorium. The duration of this repayment holiday depends on your loan terms. Check all the conditions before deciding on a financial plan.   

What is the Education Loan Repayment Period?

The repayment tenure is the post-moratorium stage where the repayment journey starts. The duration of the repayment tenure depends on various factors such as bank type (Private, Public or NBFC), loan amount, co-applicant’s income, bank's policies, and borrower's preference. A shorter repayment tenure reduces future interest but leads to a higher EMI amount. A longer tenure reduces the EMI burden but increases the overall loan amount. It is important to understand how to plan your tenure and EMI cycle to minimise future burden.

Choose the Right Repayment Plan

Repayment of the education loan is easy if the applicant has a plan and financial discipline. Bank EMIs are charged on a set date every month, which remains constant. The EMIs are also predetermined, but as all education loans fall under a floating rate of interest, there can be fluctuations due to repo rates. The fluctuations in EMIs are communicated in advance to the applicant, giving them ample time to reorganise their finances. This makes it easier to plan your finances and ensure that you do not miss out on EMI payments. 

• Plan Your Monthly Budget: Prior to your repayment starting, understand how much of your income can comfortably go toward your EMI. Don’t stretch your finances too thin; missed payments can affect your credit negatively.

• Repayment Tenure: Your repayment tenure decides your EMI structure. Public banks offer up to 15 years, and private banks or NBFCs offer 10 to 12 years for paying back your education loan. The repayment tenure can be altered, and you have the option to foreclose a loan, so make sure that you choose the tenure that gives you the desired EMI cost. 

• Interest Charged: Calculate the EMI and the total interest charged on your loan before finalising it with your bank; compare different banks and repayment periods to choose the best options.

• Partial Prepayment: Students have an option to prepay a certain amount of the loan that is deducted from their principal amount. Some banks and NBFCs have rules regarding prepayment, such as lock-in periods and charges. Check the terms and conditions before opting for the same. 

• Communicate with Your Bank: During any financial crisis, make sure to inform your bank in advance so that they can suggest an alternative plan of payment. Not answering their calls or emails will just make the situation worse.  

How to Repay Education Loan

There are many available methods to pay your EMI. These are generally decided by the applicant’s choice or the bank’s discretion at the beginning of the repayment process. If you understand the technical aspects of the repayment process, you can avoid mistakes that can lead to missed EMI payments. Some of them are:

1. Auto-Debit (ECS/NACH/Standing Instruction)

You can approach your bank and request them to integrate the auto-debit feature on your savings or current account. This enables the bank to auto-debit the EMI on a pre-decided date or approximate time bracket. This ensures timely payments and removes the hassle of consent reminders.

2. Online Loan Payments

Repaying your education loan has become simpler through the introduction of online loan payment options. You can repay your EMIs through internet banking options and UPI, debit cards, or loan portals, depending on your convenience. Online payment options allow you to keep track of your loan terms and repayment balance for easy access. Make sure to confirm the applicable options through your bank branch before the EMI repayment period starts. 

3. Interest-Only Payments During Moratorium (If Allowed)

Different banks have different rules for interest-only payments. Some lenders may allow or require borrowers to service part or all of the accrued interest during the moratorium period. The applicable amount and payment schedule depend on the lender's terms. For example: SIB (South Indian Bank) requires the borrower to pay ⅓ of the interest charged. It is advised that the borrower check with their bank to avoid confusion. 

4. Salary Account Auto-Deduction

Some banks offer the option to link your salary account with your education loan, allowing EMIs to be deducted automatically as soon as your salary is credited. This helps the borrower avoid any missed payments. The process is not very different from the auto-debit feature, but in this scenario, you have to maintain the salary account status for the repayment period. This option also helps the borrower during filing of ITR.

Can You Prepay or Foreclose an Education Loan?

Yes, applicants have the option of partial prepayment and foreclosure of an education loan, according to the terms and conditions of the loan agreement. Partial prepayment of the loan reduces the outstanding principal amount and, based on the repayment process, can reduce the total interest paid during the repayment tenure. 

Partial Prepayment: Means paying an additional amount before the scheduled repayment date, which is deducted from the outstanding principal amount. This can reduce the loan balance and subsequently the total interest charged. 

Full Foreclosure: Means paying the entire outstanding loan amount before the repayment tenure ends. Closing all the applicable dues in advance allows the loan account to be closed, saving years of interest charges and EMI additions.

But the choice to make partial prepayment and full foreclosure depends upon several factors. Before deciding to prepay or foreclose, check with your lender about:

• Minimum prepayment amount, if applicable
• Lock-in period, if stated
• Prepayment charges or fees

If you have sufficient funds available, prepayment or foreclosure can be considered as part of your overall financial plan. However, avoid using all your available savings to repay the loan if it leaves you without an adequate emergency fund.

What Happens When You Miss an EMI Payment?

When you miss an education loan EMI, it can result in added charges on your account and can also negatively impact your credit history. Depending on how long the EMI remains outstanding and the loan agreement terms, the lender/bank can levy default charges and make claims.  

You can read a detailed blog on what happens when you default on an education loan to understand the process. 

Education Loan Recovery 

Education loan recovery in India happens through RBI guidelines and the terms of your loan agreement. Missing one or two EMIs does not immediately result in legal action, but prolonged delays and regular defaults can lead to strict measures. If the principal or interest remains overdue for more than 90 days, the loan may be classified as a Non-Performing Asset (NPA), subject to applicable RBI norms and the lender's processes. 

After this period, the bank will look for options to recover the loan amount. An NPA/default can negatively affect your credit history and may make it more difficult to access credit in the future. It is also hard to recover your credit score after an NPA default, so make sure that you make payments on time and contact your bank in case of any financial difficulties. 

Tax Benefits 

Section 80E Deductions: If you opt for the old tax regime, you can claim a tax deduction on the interest paid towards your education loan. The tax exemption is calculated based on the qualifying education loan payment, subject to taxation terms and conditions. The tax deductions can be claimed for up to eight years starting from the year interest repayment begins. The deduction is available only for loans taken from approved financial institutions or banks for higher education. Under the new tax regime, this deduction is not available. Hence, if you pick the right repayment plan and are timely with your payments, you can enjoy additional benefits with your finances. 

Conclusion

An education loan is a great support system for your study abroad aspirations, and repayment is an integral part of it. Make sure you understand and plan aspects like tenure, EMIs, and prepayment rules during the loan process. To avoid penalties, credit loss, CIBIL issues, and additional debt, make your EMI payments on time and enjoy the benefits that come with it!