WHAT IS INTEREST ON AN EDUCATION LOAN?

 

What Is Interest on an Education Loan?

Interest is the cost of borrowing money. When a bank or financial institution gives you a loan, they charge interest on the principal amount (the original sum you borrowed). This interest can be simple or compound, and it is usually expressed as an annual percentage rate (APR).

When Does Interest Start Accruing?

The exact timing of when interest starts to accumulate on your education loan depends on the terms set by the lender and the loan agreement. However, the general rule is:

  • Interest starts accruing from the day the loan amount is disbursed to the educational institution or to the borrower’s account.

This means that as soon as the bank releases funds for your education fees or related expenses, the interest on that amount begins to accumulate, even if you are still studying and not yet repaying the loan.

During the Course Period: Interest Accrual vs. Repayment

While interest starts accruing immediately after disbursement, the repayment of the loan usually does not begin right away. Most education loans offer a grace period or moratorium period, which covers:

  • The entire duration of the course.
  • An additional 6 to 12 months after completing the course, allowing time for the student to find a job.

During this grace period:

  • You typically don’t have to make monthly repayments.
  • But interest continues to accumulate on the loan amount.
  • The accumulated interest may be added to the principal loan amount after the grace period ends (called capitalization), increasing the total repayment amount.

Interest Subsidies and Benefits

Some government-sponsored education loans offer interest subsidies, where the government pays the interest during the course period or moratorium. This reduces the burden on the borrower.

For example:

  • The Indian government’s Central Sector Interest Subsidy Scheme allows eligible students to get interest waived during their study period and the grace period.
  • Private loans or loans without subsidies require the borrower to pay or capitalize the interest.

After the Course Ends: Repayment Period

Once the grace period ends, you enter the repayment phase. At this point:

  • You start paying monthly installments (EMIs) covering both principal and interest.
  • The interest rate remains the same as per your loan agreement.
  • Timely repayment helps avoid penalties and reduces the total interest paid over the life of the loan.

Key Takeaways for Borrowers

  • Interest starts accruing from the first disbursement of the loan.
  • You don’t usually have to repay during your course, but interest keeps accumulating.
  • Check if your loan has an interest subsidy or moratorium benefits.
  • Plan for repayment after your course to avoid surprises in the total repayment amount.

 

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