By availing an education loan, most students pursue higher studies in India or abroad. However, it is essential to understand how education loan interest accrues, considering that the total amount of money you repay eventually might be much higher than what you initially borrowed. This is due to interest accumulating continuously, even though you do not pay anything during the study period. Let us see how it works in a simple manner, particularly when we take a study loan in India.

What Is Interest and When Does It Accrue?

Interest is the additional amount you pay over and above the loan amount you take. For an education loan, this interest begins accruing as soon as the loan amount is initially forwarded to your college or university.

Almost all the banks in India offer a moratorium period during your course and for a couple of extra months after your course completion. During this moratorium period, you don’t need to pay EMIs, but interest on the education loan continues to accumulate during those months. Most people think that the interest moratorium period is interest-free, but this is not the case. Most of the banks, during this period, charge simple interest, and simple interest is calculated on the original amount of the loan.

If you do not pay this interest during your study period, the bank capitalises it later on your total loan. This is referred to as interest capitalisation. Thus, after you begin paying EMIs, you are not only paying the borrowed loan but also the accumulated interest during the period of moratorium. This increases the overall repayment amount way beyond expectation.

Various Types of Interest Rates and Their Impact in the Long Run

Indian banks typically provide two interest rates for study loan India:

Fixed Interest Rate

– The interest rate remains constant over the duration of the loan. It is simple to budget, but it might be slightly higher.

Floating Interest Rate

– The rate fluctuates with market changes. It could begin at a low level but rise afterwards.

In both forms, the longer you repay the loan, the greater education loan interest you will have to pay. Even a slight variation in rate of interest can make a huge difference in total payout over several years.

How EMIs Work and How Interest Impacts Them

Once your moratorium time is over, you must begin making monthly payments, known as EMIs (Equated Monthly Instalments). Every EMI consists of a slice of the loan amount and a slice of the interest.

Initially, most of your EMI is used to cover the interest, and only a negligible slice goes to lessening the actual loan.

This arrangement is such that the longer you delay starting to pay your EMIs, the greater education loan interest will accumulate. The sooner you begin repayments, the lesser the aggregate amount of interest you’ll end up paying over a period of time.

Paying Early Saves Interest

When you receive a job during your studies or shortly after completion of your course, you can begin repaying even if it is in small instalments. This minimises interest that accrues later on.

Most Indian banks don’t even levy a penalty for paying back education loans early.

If at all possible, attempt to pay the simple interest throughout your study duration. This reduces the overall loan amount eventually. In addition, paying extra whenever you can assist you in repaying your loan early and saving education loan interest in the long run.

How Loan Tenure Affects Interest

Selecting a longer period to repay your loan will appear simpler because the EMIs are lower. But that means interest continues to accrue for more years.

For instance, if you opt for a 10-year study loan in India, your EMIs will be lower than in the case of a 5-year loan—but you’ll pay much higher education loan interest in the long term. If it is possible to take a shorter loan duration, you’ll save a lot on interest.

Interest Subsidy Schemes from the Government

The Indian government has a couple of schemes for providing loan interest to students. One among them is the Central Sector Interest Subsidy (CSIS). If your family income is low, your interest will be reimbursed by the government during your moratorium period.

This can decrease your overall loan burden. But don’t forget, once this period of subsidy is completed, the normal education loan interest again begins to accumulate. So, it’s still crucial to know how interest accumulates later.

Conclusion: Understand and Plan to Save Money

Education loan interest accumulates silently over the years, particularly when you are not paying anything. Whether you are taking a study loan in India or already possess one, it is extremely crucial to know how education loan interest accumulates.

Try to pay interest during study time if possible. Select a shorter loan duration if possible. Pay early or extra to minimise your total interest. Proper planning at present will minimise money issues in the future.