Education loan interest rate is one of the most important factors which must be considered while applying for a loan. Education loans serve as a lifeline, covering tuition fees, living expenses, and more. However, understanding how education loan interest is calculated is crucial to managing your finances effectively. The banks and financial institutions offer two types of interest rates: (a) Fixed interest rate, and (b) Floating interest rate. This blog will guide you through the process of how to calculate education loan interest rates ensuring you’re well-prepared for your international academic journey.
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How to Calculate Education Loan Interest?
To calculate education loan interest, you need to understand whether simple interest or compound interest applies. During the moratorium period (course duration plus grace period), simple interest is typically charged, calculated using the formula: SI = (Principal × Rate × Time) / 100. Once repayment starts, monthly EMIs are determined using the compound interest formula: EMI = [P × r × (1 + r)^n] / [(1 + r)^n – 1], where P is the loan amount, r is the monthly interest rate, and n is the loan tenure in months. You can use Fly Finance EMI calculator to understand the breakup. Most banks and financial institutions in India offer education loans with an interest rate ranging from 7% to 14%, depending on the lender, loan amount, and repayment tenure.
Also Read: Check this blog and understand How to Get Education Loan for Abroad Studies
Understanding the Basics of Education Loan Interest
An education loan is repaid in two parts: principal and interest. In the first few years of the loan repayment period, a major amount goes towards the payment of interest rate. When a major part of the interest rate is paid, the larger amount of EMI goes towards the payment of the principal. You can understand the loan repayment by checking the education loan amortization schedule. The EMI amount may vary if the bank is charging a floating rate of interest, which is subject to change every 3 months.
Components of Education Loan Interest
Education loan interest is influenced by key components such as the loan amount (principal), which determines the base on which interest is calculated; the interest rate, which can be fixed or floating and varies by a lender; and the repayment period, where longer tenures reduce EMI but increase the total interest paid. Additionally, the moratorium period (course duration plus grace period) plays a role, as simple interest is usually charged during this time. Check the details below:
- Loan Amount (Principal): Several banks charge high rates of interest for low amounts of loans. For example, you might have to pay a higher interest rate for a loan amount below INR 7.5 lakhs (subject to terms and conditions).
- Interest Rate: Most banks offer a floating rate of interest on education loans. Your EMI amount may increase or decrease depending on the fluctuations in the interest rate. Education loan refinancing is a better way to reduce the cost of a loan if interest is high.
- Repayment Period: Longer tenures reduce EMI but increase the total interest paid. If you want to save money and make the loan cheaper, choose a shorter repayment period if you can manage to pay a higher EMI amount.
- Moratorium Period: A grace period given to students during their course plus 6-12 months after completing their education. During this period, simple interest is typically charged.
Also Read: Check here all the details on how much does it cost to study architecture in Australia
Formula to Calculate Education Loan Interest
The interest is calculated using the formula for Simple Interest (SI) or EMI (Equated Monthly Installments). Check the process below and learn how to calculate education loan interest.
Simple Interest Formula
The interest rate for an education loan can be calculated using the formula:
EMI = [P x R x (1+R)^n] / [(1+R)^n-1]
Where:
- P: is the principal amount
- R: is the rate of interest per month
- n: is the loan tenure in months
For example
Let’s say the principal amount is INR 100,000, the repayment period is 5 years, the interest rate is 11.15%, and there is a moratorium period of 3 years (course period plus 1 year).
We can calculate the simple interest during the repayment period using the following formula:
Simple Interest = Principal x Interest Rate x (Repayment Period – Moratorium Period)
In this example, the simple interest would be:
Simple Interest = INR 100,000 x 11.15% x (5 years – 3 years) = INR 22,300.00
During the moratorium period, you don’t have to pay any interest on the loan. However, the interest will still accrue. The total amount payable at the end of the repayment period would be the sum of the principal amount and the simple interest.
Therefore, the total amount payable would be:
Total Amount Payable = Principal Amount + Simple Interest i.e. INR 100,000 + INR 22,300.00 = ₹122,300.00
| Parameter | Value |
| Principal Amount | INR 100,000 |
| Repayment Period | 5 years |
| Interest Rate | 11.15% |
| Moratorium Period | 3 years |
| Simple Interest | INR 22,300.00 |
| Total Amount Payable | INR 122,300 |
Compound Interest Formula
For compound interest, the interest is calculated on both the initial principal amount and the accumulated interest from the previous periods. This means the interest grows over time.
You can calculate the compound interest using the following formula:
Future Value (FV) = P x (1 + r)^n
Where:
- FV = Future value (total amount payable)
- P = Principal amount
- r = Interest rate per period (we will adjust for annual interest)
- n = Total number of payment periods
In this example, we will assume monthly payments. Therefore, we need to adjust the interest rate to monthly by dividing the annual interest rate by 12.
Here’s how to calculate the compound interest for the education loan:
- Calculate the interest rate per period:
Interest per period = annual interest rate / 12
- Calculate the total number of payment periods:
Total periods = repayment period + moratorium period
- Calculate the future value (total amount payable):
Future value = principal x (1 + interest per period) ^ total periods
For example:
Principal amount (P) = INR 100,000
Annual interest rate (r) = 11.15%
Repayment period = 5 years
Moratorium period = 3 years
1. Monthly interest rate:
Interest per period = 11.15% / 12 = 0.929%
2. Total number of payment periods:
Total periods = 5 years + 3 years = 8 years
Total periods = 8 years x 12 months/year = 96 months
3. Future value (total amount payable):
Future value = ₹100,000 x (1 + 0.00929) ^ 96
Future value = ₹107,679.62 (approximately)
| Parameter | Value |
| Principal Amount | INR 100,000 |
| Repayment period | 5 years |
| Interest Rate | 11.15% |
| Moratorium period | 3 years |
| Total Amount Payable (Compound Interest) | INR 107,679.62 |
As you can see, the total amount payable using compound interest (INR 107,679.62) is higher than the total amount payable using simple interest (INR 122,300.00) for the same loan. This is because compound interest takes into account the interest earned on the accumulated interest, leading to a higher overall interest amount.
Note: It’s important to remember that this is a simplified example, and other factors, such as loan fees and different repayment schedules, may affect the actual interest amount you will pay. It’s always best to consult with your loan provider for the exact terms and conditions of your loan.
Factors Affecting Loan Interest
Some of the major factors affecting the education loan interest rate are the credit score of the applicant, loan amount, repayment period, type of loan etc. Check the details of all major factors affecting the education loan interest rate.
Credit Score
Your credit score is a numerical representation of your creditworthiness, reflecting your history of borrowing and repayment. A higher credit score indicates a lower risk to the lender, leading to more favourable interest rates. Maintaining a good credit score through timely payments, avoiding excessive debt, and limiting new credit applications can significantly impact the interest rate you’ll be offered.
Loan Amount
The amount you borrow directly influences the interest rate. Larger loan amounts are generally associated with higher interest rates. Lenders perceive larger loans as riskier, and they compensate for that risk by charging higher interest.
Repayment Period
The length of your loan term also affects the interest rate. Longer loan terms often come with higher interest rates. This is because the lender is exposed to risk for a longer period, and they charge a premium to compensate for that extended risk.
Type of Loan
Different types of loans, such as personal loans, auto loans, and mortgage loans, have varying interest rates. The interest rate for a particular loan type depends on several factors, including the perceived risk associated with the loan, the current market conditions, and the specific lender’s policies.
Economic Conditions
Economic factors, such as inflation rates, monetary policy, and overall economic growth, can influence interest rates. When inflation is high or interest rates are rising, lenders may adjust their rates to compensate for increased costs and risks.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio measures your monthly debt payments relative to your monthly income. A lower DTI ratio indicates that you have a lower debt burden and a higher capacity to repay the loan, which can lead to a lower interest rate.
Understanding how education loan interest is calculated empowers you to make informed financial decisions as you plan your studies abroad. Check some FAQs based on how to calculate education loan interest below:
FAQs
During the moratorium period, simple interest is typically calculated on the principal loan amount. This interest accumulates but is not payable until the repayment period begins.
A fixed interest rate remains constant throughout the loan tenure, making it predictable. A floating interest rate fluctuates with market conditions, potentially leading to varying EMIs.
Generally, larger loan amounts are associated with higher interest rates. Lenders perceive larger loans as riskier and may charge a premium to compensate for that risk.
While you may not be able to directly reduce the interest rate, you can consider refinancing your loan if interest rates have decreased. Additionally, maintaining a good credit score can positively impact your interest rate.
Longer repayment periods result in lower monthly EMIs but higher overall interest costs. Shorter repayment periods lead to higher EMIs but lower total interest.
An amortization schedule provides a detailed breakdown of each EMI payment, showing how much goes towards principal repayment and interest payment over the loan tenure.
You can use online EMI calculators or financial calculators to calculate your EMI based on the principal amount, interest rate, and loan tenure.
The moratorium period is a grace period during which you are not required to make repayments. However, interest continues to accrue during this time.
Most lenders allow prepayment of education loans. Prepaying reduces the outstanding principal, leading to lower interest payments over time.
A higher credit score indicates a lower risk to the lender. A good credit score can help you secure a lower interest rate on your education loan.
To know more about education loans, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
