How education loans work
Indian education loans come with a moratorium: you don't have to pay EMIs during the course and for 6–12 months after it. But interest still builds up, usually as simple interest on the amount disbursed. At the end of the moratorium, that accumulated interest is added to the loan and your EMIs are calculated on the larger amount.
Moratorium interest = loan × rate × moratorium years (simple)
EMI = (loan + moratorium interest) × i(1+i)^n ÷ [(1+i)^n − 1]Worked example
Paying interest during the course
If the family can afford it, paying the monthly interest while the student studies is one of the best ways to reduce an education loan's cost. Tick the box above to see the effect. Some banks also give a small rate concession (often 0.5–1%) if interest is serviced during the moratorium.
Tax deduction on education loan interest
Under the old tax regime, the full interest paid on an education loan for higher studies (for yourself, your spouse, children, or a student you're the legal guardian of) is deductible, with no upper limit, for up to 8 years from when repayment starts. The loan must be from a bank or approved institution. There's no such deduction under the new regime, and principal repayment is not deductible.
Government interest subsidy
Students from economically weaker families may qualify for central government interest subsidy schemes on loans for recognised courses, which can cover the moratorium interest. Ask your bank which schemes apply to your course and income.
Frequently asked questions
Is interest charged during the moratorium?
Yes, almost always. It's usually simple interest, added to the loan when repayment begins.
Can I prepay an education loan?
Yes. Most banks allow prepayment without penalty on floating-rate education loans. Add an extra amount above to see the effect.
Do I need collateral?
Banks usually lend up to about ₹7.5 lakh without collateral under the credit guarantee scheme; larger loans often need security or a guarantor.