Calculate Education Loan Interest

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HowdobankscalculateIntereston
EducationLoaninIndia?
May22,2017
How do banks calculate Interest on Education

Loan in India? In India, interest calculation of
education loan is done in twoparts.Ifyoukeep
paying your interest from the very first month,
then the interest would be calculatedasSimple
Interest, unlike other loans, wherein you pay
compound interest from day 1 with no choice.
However, if you do not pay your interest every
month, then the interest would be calculated as Compounded Interest. So, choice is yours,
wouldliketopayinterestlessormore?
LetsCalculateInterest:
Part1:
During moratorium period, Simple Interest is calculated on the amount which you have already
taken for your fees. Remember, in school maths, there use to be a formula for simpleinterest?
Right,thesameone,thatis
SI=(PxRxT)/100;
where,SI=SimpleInterest
P=PrincipalAmount
R=RateofInterest,hereitwouldbeperannumalways
T=Time,hereitwouldbeindaysalways
Therefore,nowtheformulawillbe
SI=(PxRxT)36500
Now, lets say, your education loan amount is Rs.4.00 lakhs. Loan tenure is 15 years after
moratorium period. And, your course duration is 4 years. It means your moratorium period will
be 4 years + 12 months, which is equal to 5 years or 60months,incaseofyourunemployment
after course completion. If you have secured employment, in thatcase,yourmoratoriumperiod
willbe4years+6monthsaftersecuringjob,whichmakesatotalof4.6yearsor54months.
Now, for instance, on Nov 04, 2016 you have requested for Rs. 1.00 lakh for your 1st
semester fees. Once this amount gets debited from your loanaccountonNov04,2016,
you will be start charging simpleinterestonthisRs.1.00lakhfrom4thdayofNov2016.
LetscalculateInterestnow.Asperformula,
P=Rs.100000.00
R=9.35+1.50=10.85%perannum(PleasecheckthelatestRateofInterestfromtheBank)
T=27Daysi.e.fromNov4,2016toNov30,2016
Thatmeans,theSimpleInterestwhichyouneedtopayonDec1,2016,is
SI=(10000010.8527)36600=Rs.800.00,
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Note: Here, instead of 365 Days, 366 Days are taken for calculation, because, 2016 is a leap
year.
If you do not pay this interest amount on Dec 1, 2016, then Dec 1, 2016 onward, your
principal amount would become Rs.100800.00, and interest for Dec 206 will be
calculatedonthisprincipal.
Now, you have requested your 2nd semester fees on Apr 4, 2017. The amount of the
feesisRs.1.00lakhs.
How,theInterestwillbecalculatedthistime,letssee.
If youkeeppayingyourmonthlyinteresteverymonth,inthatcaseyourprincipalamount
should remain same, that is Rs.1.00 lakh, and we will assume the samesothatyoucan
understandthecalculationbetter.
Previous outstanding of Rs.1.00 lakh and, new outstanding of Rs.1.00 lakhs, so total
principalamountwillbeRs.2.00lakhs.Now,asperformula,
P=Rs.200000.00
R=10.85%pa
T=27Days
Therefore,SI=(20000010.8527)/36500=Rs.1605.00
During your moratorium period, calculation of SI will done in the same way. This was the one
partofthecalculation.Now,letsproceedtothe2ndpart.

Part2:
Once yourrepaymentstarts,thatistherepayment
of 1st EMI, then, interest will be compounded
annually.Letsseehow?
Letssay,whenyourrepaymentstarts,your
outstanding isRs.4.00lakhs,asyoukeptrepaying
interest in every month during your moratorium
period. On this principal, compound interest will
becalculatedfor15years@10.85%patoconvert
the total amount of Principal & Interest both, into monthly EMI, which is a fixedamount
and cant be changed. So, nowtheamountwhichyouwillbepayingasEMIeverymonth,
willbecalculatedusingbelowmentionedformula:
Amount=P 1+R/100 ^n
where,P=Principalamount,thatisthetotaloutstanding
R=RateofInterest,hereits10.85%pa
n=LoanTenure,hereits15years
So,thecalculationofEMIwillbesomewhatlikethis:


Hence, your EMI for next 180 months or 15 years is Rs.4508.80. And, this calculation is valid
only, if you are simultaneously repaying your monthly interest during moratorium period. If you
want, you can always consider prepayment option. In case of PSU Banks there isnochargefor
prepayment, however, Private sector banks charge some extra amount forprepayment.So,this

option varies bank to bank. There are many apps available for EMI Calculation, so you can
alwayscalculateInterestbeforeyouplanforanyloan.
One very important thing which I would love to discuss here. And, thats the tax benefit on the
interest amount of your education loan under Section 80(E) of Income Tax Act . Repayment of
monthly interest is mandate to avail this benefit. And, this is the best strategy to repay your
studentloanontime.
I have tried toexplainthiscomplicatedcalculationinmostsimpleway.Please,commentbelowto

addtothetopicorforanyqueries.
Consequences of Loan Default like Education

LoanoranyLoan?
You may have serious consequences of loan default, even if its unsecured. And, even if its an
Education Loan or any other loan for that matter.
If you default on your loan, whether its an
Education Loan, Home Loan or any loan for that
matter. It will appear on your CIBIL Report or
credit report. Check the terms & conditions and
other details before you sign off on a loan
agreement. Of course, if you have money lying
around, it does beg the question as to whyyoure
notmakingrepayments!
If you do not put in any effort to negotiate or settle a debt and it gets written off, then, you are
ruining your CIBIL report indefinitely. That means that default will remain on your CIBIL report

forever. However, if you try and settle the debt through recovery teams or Credit recovery
camps,thendefaultsorpartialdefaultsareremovedfromyourcreditreportafterthreeyears.
ConsequencesofLoanDefault:
SocialReputationisatrisk:
Banks or financial institutions may keep coming to your residential address for recovery of
default loan amount or the complete loan amount. When they come your residence, they may
talk to your neighbours about you. Also, they call on the telephone numbers on which you call
frequently for the recovery. It definitely affects your image among your family,friends,relatives
andcolleagues.
DifficultiesinEmployment:
If you are already in a job and you default on your loan. In that case, your bank or financial
institution may follow you to your office as well for the recovery of yourdefaultloanamountor
complete loan amount in some cases. As a result, your good will, name and fame everything
maygetruined.
In other scenario, if you are looking for ajob,inthatcase,yourpotentialemployercannotcheck

your credit report or CIBIL Report. However, they may request you to show it.Somecompanies

have strict policies against hiring people who have defaulted before. This may be taken as a
sign of irresponsible behavior. In some industries, suchasfinance,loandefaultmayaffectyour
job badly because it could be considered that how would people trustafinancialadvisorwitha
longlistofdefaults.
HavingMoneySeizedfromYourAccounts:
If you have money in the lending bank, they may be able to take it and use it towards repaying
yourdebt.However,itdependsonthebankinquestionandthetermsandconditionsinvolved.
LegalProceedings:
On the basis of the contractthatyousignedfor

a loan, you are legally obliged to pay back your
debts.Ifyoudonotrepayyouloan,yourbankor
financial institution may initiate legal
proceedings against you. You will usually
receive the first legal warning if you have not
maderepaymentinmorethan30days.

NoAccesstoCrucialLoans:
If you do not repay yourloansontime,anykindofloanforthatmatter,thisloandefaultofyours
will reflect in your CIBIL report. A poor CIBIL score or credit scorewillmakeitdifficulttoobtain
crucial loans, such as a home loanoreducationloanorbusinessloan,etc.Youmaydeprivedof
important financial requirements or opportunities. For instance, people unable to get a home
loan are often forced to rent. This is a significant waste of money, as they are unable toowna
home to rent out or resell. Those unable to get education loans may struggle to find better job
opportunities,orobtainpromotions.
LookingforLoanForgiveness?
So, if youre in loan default, start taking action immediately and make sure to create a plan of
action.Ignoringyourstudentloansoranyotherloanforthatmatter,wontmakethemgoaway.
There are optionsthosecanhelpyougetoutofloandefault.Loanconsolidationisoneofthose.

It lets you to consolidate your loans into a new single loan with a fixed interest rate. However,
options vary from bank to bank or one financial institution to another. So,youneedtoresearch

these options as per your bank or financial institution and work with your lenders to figure out
whatyoucandotogetoutofdefaultbecausetherearenowaystoskipthematall.
In short, getting your debt written offmayseemlikeagoodthingintheshortterm,therealcostsarerarelyworthit

!!!
InsteadreadthistofindouttheBestStrategytorepayyourEducationLoananditsbenefits.
Alsoread:CentralSectorSchemeofScholarshipforCollegeandUniversityStudents

Calculate Education Loan Interest

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Calculate Education Loan Interest

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MoneyMaya-PersonalFinancialBlog

How do banks calculate Interest on Education

I have tried toexplainthiscomplicatedcalculationinmostsimpleway.Please,commentbelowto

Consequences of Loan Default like Education

In other scenario, if you are looking for ajob,inthatcase,yourpotentialemployercannotcheck

On the basis of the contractthatyousignedfor

There are optionsthosecanhelpyougetoutofloandefault.Loanconsolidationisoneofthose.

In short, getting your debt written offmayseemlikeagoodthingintheshortterm,therealcostsarerarelyworthit

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