Education Loan Moratorium: Pay Interest Now or Later?

During an education loan moratorium you do not pay EMIs, but interest keeps building up, and the unpaid amount is added to your loan when repayment starts. On a ₹10 lakh loan at about 10% for a four-year course plus one year, that adds roughly ₹5 lakh to the principal. If your family can pay the simple interest each month during studies, the loan stays at its original size and you save lakhs over the repayment period.

This article focuses only on the moratorium. For eligibility, collateral and documents, see our education loan guide.

What the moratorium is

The moratorium (also called the repayment holiday) is the period between your first disbursement and your first EMI. Most bank schemes follow the Indian Banks' Association (IBA) model education loan scheme:

• Length: the course period plus one year. Older versions of the IBA scheme said course period plus one year or six months after getting a job, whichever is earlier, and some banks still use that wording.
• Repayment period after it ends: up to 15 years under the revised model, though individual banks may offer shorter terms for smaller loans.
• Interest during the moratorium: simple interest on the amount disbursed, which is optional to pay. Any unpaid interest is added to the principal when repayment begins, and EMIs are calculated on that larger amount.

The moratorium is not a waiver. It is a delay, and the interest during the delay is usually the single biggest avoidable cost of an education loan.

How moratorium interest is calculated

Most banks charge simple interest during the moratorium, on each tranche from the date it is disbursed. Because fees are released year by year, the interest on later tranches runs for a shorter time.

Formula for each tranche:

Interest = Amount disbursed × Annual rate × Years until repayment starts

Once repayment starts, the accrued interest is capitalised (added to the principal), and from then on interest is charged on the reducing balance, like any EMI loan. Our explainer on how EMI is calculated shows the reducing-balance method.

Worked example: three ways to handle the moratorium

Riya takes a ₹10 lakh loan at 10.15% a year (SBI's Student Loan rate without collateral as of October 2026, used here only for illustration) for a four-year engineering course. Her moratorium is four years plus one year, so five years. To keep the maths simple, assume the full amount is disbursed at the start. Repayment is over 10 years. All figures are illustrative.

Option A: pay nothing during the moratorium

1. Interest accrued: ₹10,00,000 × 10.15% × 5 = ₹5,07,500
2. Loan when repayment starts: ₹15,07,500
3. EMI over 10 years: ₹20,047
4. Total repaid: ₹20,047 × 120 ≈ ₹24.06 lakh

Option B: pay the simple interest every month

1. Monthly interest: ₹10,00,000 × 10.15% ÷ 12 = ₹8,458
2. Paid over 60 months: ₹5,07,500
3. Loan when repayment starts: still ₹10,00,000
4. EMI over 10 years: ₹13,298
5. Total repaid: ₹5,07,500 + ₹15,95,793 ≈ ₹21.03 lakh

Option C: eligible for PM-Vidyalaxmi 3% subvention

If Riya's family income is up to ₹8 lakh a year and she is admitted on merit to a listed institution, the government pays 3 percentage points of the interest during the moratorium on loans up to ₹10 lakh.

1. Interest Riya bears: ₹10,00,000 × 7.15% × 5 = ₹3,57,500
2. Loan when repayment starts: ₹13,57,500
3. EMI over 10 years: ₹18,052
4. Total repaid ≈ ₹21.66 lakh

Paying the interest saves about ₹3 lakh in total and cuts the EMI by about ₹6,700 a month for ten years. Combining the subvention with monthly interest payments would save even more. Run your own figures in our EMI calculator.

Government schemes that reduce moratorium interest

As of October 2026:

• PM-Vidyalaxmi: 3% interest subvention during the moratorium on loans up to ₹10 lakh, for students with family income up to ₹8 lakh a year who get merit-based admission to a listed quality higher education institution (QHEI). It also gives a 75% credit guarantee on loans up to ₹7.5 lakh. Applications go through the PM-Vidyalaxmi portal.
• Central Sector Interest Subsidy (CSIS): full interest during the moratorium for students from families earning up to ₹4.5 lakh a year, for eligible courses in India. You cannot combine it with PM-Vidyalaxmi subvention.

Both are for courses in India only. If you are planning to study overseas, see our comparison of education loans for India vs abroad.

The subsidy is credited to the loan account by the bank, so check your statement each year to confirm it has actually been applied.

Should you pay interest during the moratorium?

Pay it, if you can, when:

• Parents have a steady income and the monthly interest fits the household budget.
• The loan is large, the rate is high or the course is long.
• You want a lower EMI in your first job, when salary may be modest.

It may be reasonable not to pay, or to pay only part, when:

• Paying would drain the family's emergency fund. Our guide on how much emergency fund you need helps you check.
• You qualify for CSIS, which covers the full moratorium interest.
• The family has other high-interest debt, such as credit card dues, which should be cleared first.

Partial payment works too. Every rupee of interest paid during the moratorium stops that rupee from being capitalised and charged interest for the next 10 to 15 years.

Some banks offer a small rate concession if interest is serviced during the moratorium. Ask your bank whether it does, and get it in writing.

Tax angle: timing the Section 129 deduction

Under Section 129 of the Income-tax Act, 2025 (old Section 80E), the interest you pay on an education loan is deductible with no upper limit, for the year you start paying interest and the next seven years. Points to note:

• The deduction is for interest actually paid, by the person who took the loan for their own, their spouse's or their child's higher education (or a student for whom they are legal guardian).
• It is available only under the old tax regime.
• If the student is the sole borrower and parents pay the interest, the parents generally cannot claim it. If tax planning matters, discuss with your bank who the borrower and co-borrower should be.
• Paying interest early starts the eight-year clock. If the borrower has little or no taxable income during studies, those years give no tax benefit.

Treat tax as a secondary factor. The interest saved by paying early is usually larger than the tax deduction lost.

When the moratorium ends

• Check the capitalised amount. Ask the bank for a statement showing accrued interest, subsidies credited and the new principal.
• Confirm the EMI and tenure in writing, and set up an auto-debit from the borrower's salary account.
• Ask for a restructuring early if you have not found a job. Read loan restructuring options before you miss an EMI.
• Prepay when you can. Under RBI's prepayment directions, floating-rate loans to individuals for non-business purposes sanctioned from 1 January 2026 cannot carry prepayment charges.

Key takeaways

• The moratorium is usually the course period plus one year; EMIs are deferred, interest is not.
• On a ₹10 lakh loan at 10.15% over a five-year moratorium, about ₹5.08 lakh of interest is added to the loan if nothing is paid.
• Paying the simple interest monthly saved about ₹3 lakh in our illustrative example and cut the EMI by about ₹6,700.
• PM-Vidyalaxmi (3% subvention, family income up to ₹8 lakh) and CSIS (full subsidy, up to ₹4.5 lakh) reduce moratorium interest for courses in India.
• The Section 129 (old 80E) deduction applies only to interest actually paid, in the old regime, for eight years from the first payment.