A bigger education loan is not just a bigger sanction letter. It is a bigger EMI for ten or fifteen years, starting when the student is in the first or second job. Before you ask the bank for more, it helps to see what each extra lakh really costs and which choices during the course make that cost smaller.
The direct answer: the cost of education loan repayment depends on three things you partly control: whether you pay interest while studying, how long you stretch the repayment, and whether you prepay when money comes in. On top of that, tax relief on the interest can soften the bill for families on the old tax regime. Get these right and you can borrow what the course needs without the loan running your life afterwards.
Why the cost matters more than the sanction
Under the IBA Model Education Loan Scheme that banks follow, the loan amount is need-based, and education loan repayment is spread through EMIs over up to 15 years after the moratorium. Two families can borrow the same amount and end up paying very different totals, depending on what happens during the study years and the length of the repayment.
So the useful question is not “how much will the bank give?” but “how much will we pay back, and can the student’s salary carry it?” Borrow only what the course needs, list every expense with receipts, and treat every extra lakh as something that has to be repaid with interest.
How interest builds up during the moratorium
An education loan comes with a moratorium, a period when you do not have to pay EMIs. Under the IBA scheme, the moratorium is the course period plus one year. For a two-year postgraduate course, that is three years without EMIs.
No EMI does not mean no interest. Interest keeps running on the money the bank has paid out from the day it is disbursed. If nobody pays it, the unpaid interest is usually added to the loan when repayment begins, so the student starts repaying a larger amount than was ever borrowed. How exactly a bank charges and adds this interest is set out in the sanction letter, and terms vary by bank, so read that part carefully.
Interest support can cut this cost
Some students get help with exactly this interest. Under PM-Vidyalaxmi, students at eligible institutions with family income up to ₹8 lakh a year, who are not eligible under any other government scholarship or interest subvention scheme, can get 3% interest subvention during the moratorium on loans up to ₹10 lakh. Under the Central Sector Interest Subsidy (CSIS), families with income up to ₹4.5 lakh a year, for technical or professional courses at approved institutions, get full interest subvention during the moratorium on loans up to ₹10 lakh. If you qualify, apply, because it directly shrinks the amount that builds up while the student studies.
Paying simple interest while you study
Paying interest during the study and moratorium period is optional for the student. Many families skip it because money is tight in those years. But if a parent or guardian can manage it, paying the interest as it falls due keeps the loan at the amount actually borrowed.
The logic is simple. Interest you pay now is interest that does not join the loan. Interest that joins the loan then earns its own interest for the next ten or fifteen years, because the EMI is worked out on the bigger figure. Even paying part of the interest helps, because whatever you pay stays out of the balance.
Who usually pays it
Parents or guardians are normally co-borrowers on an education loan, so they are the natural payers during the study years. Before committing, check that paying interest every month will not drain the family’s emergency fund or crowd out other needs.
The numbers: ₹15 lakh with and without interest during study
Here is an illustration. It is not a bank offer, and real loans differ.
- Loan: ₹15 lakh, assumed to be paid out in full at the start (in practice banks often release money in stages, which lowers the interest).
- Interest: assume 10% a year for illustration.
- Course: two years, plus one year of moratorium, so three years before EMIs start.
- Interest during those three years is taken as simple interest: ₹1,50,000 a year, or ₹4,50,000 in all (about ₹12,500 a month).
How the EMI is worked out
The EMI follows the standard formula banks use. Take the yearly rate and divide it by 12 to get the monthly rate. The formula then finds a single fixed monthly amount that, paid every month for the chosen number of months, covers both the interest on the reducing balance and the full principal by the last payment. In the early months most of the EMI goes to interest; towards the end most of it goes to principal. You can try your own figures on the EMI calculator.
Plan A: the family pays the ₹4,50,000 of interest during the study years, so the loan is still ₹15 lakh when EMIs start. Plan B: nobody pays, the ₹4,50,000 is added, and EMIs start on ₹19.5 lakh. Figures are rounded to the nearest hundred rupees.
| Plan and repayment period | Loan when EMIs start | Monthly EMI | Total of EMIs | Interest paid during study | Total paid |
|---|---|---|---|---|---|
| Plan A, 10 years | ₹15,00,000 | ₹19,800 | ₹23,78,700 | ₹4,50,000 | ₹28,28,700 |
| Plan B, 10 years | ₹19,50,000 | ₹25,800 | ₹30,92,300 | Nil | ₹30,92,300 |
| Plan A, 15 years | ₹15,00,000 | ₹16,100 | ₹29,01,400 | ₹4,50,000 | ₹33,51,400 |
| Plan B, 15 years | ₹19,50,000 | ₹21,000 | ₹37,71,900 | Nil | ₹37,71,900 |
What the table tells you
Over 10 years, paying interest during study saves about ₹2,63,600 in total, and the EMI is ₹6,000 lower each month. Over 15 years, the saving grows to about ₹4,20,500, because the added interest sits in the loan for longer. In Plan B, the student repays ₹19.5 lakh of principal on a loan where only ₹15 lakh was ever borrowed.
If your bank adds interest more often than once at the end, or charges a higher rate, the gap between the two plans will be wider. If the money is released in stages, the interest in both plans will be lower. Run your own sanction terms through the calculator before deciding.
10 or 15 years: picking your education loan repayment period
A longer repayment period lowers the monthly EMI, which can make a bigger loan look affordable. The table shows the price of that comfort.
- In Plan A, stretching from 10 to 15 years cuts the EMI from ₹19,800 to ₹16,100, a drop of ₹3,700 a month, but the total paid rises by about ₹5,22,700.
- In Plan B, the EMI falls from ₹25,800 to ₹21,000, while the total paid rises by about ₹6,79,600.
- The most expensive path, skipping interest during study and repaying over 15 years, costs about ₹9,43,200 more than paying interest during study and repaying over 10 years.
A sensible middle path for many families is to take the longer tenure for flexibility, so the EMI is manageable in the first job, and then prepay whenever money allows. That way you are not locked into the higher total. Prepayment is covered below.
How much EMI is sensible?
There is no official limit on how big an education loan EMI should be compared with salary. As a rule of thumb, many planners suggest keeping the EMI to a modest share of expected take-home pay, say around a fifth or less in the first few years, so there is room for rent, food, savings and the odd emergency. Treat this as a guide, not a regulation.
As an illustration, a student expecting take-home pay of ₹1 lakh a month can carry a ₹19,800 EMI (Plan A, 10 years) at about 20% of pay. The same student with Plan B over 10 years would pay ₹25,800, closer to 26%. If the realistic starting salary for the course is ₹60,000 a month, even the ₹16,100 EMI takes over a quarter of pay, and that is a signal to borrow less or plan to pay interest during study.
Use a realistic salary
Base the check on what graduates of that course typically earn in their first job, not the top placement offer. Remember that the EMI may start in a year when the student is also moving city, paying a deposit on a flat, or still looking for work.
Prepay when you can: no charges on new floating-rate loans
Prepaying, that is paying more than the EMI or clearing part of the loan early, shortens education loan repayment and cuts the balance on which interest is charged. The earlier you prepay, the more interest you save, because early EMIs are mostly interest.
The RBI (Pre-payment Charges on Loans) Directions, 2025, dated 2 July 2025, make this easier. For floating-rate loans to individuals for non-business purposes sanctioned or renewed on or after 1 January 2026, regulated lenders, including banks and NBFCs, cannot charge pre-payment charges. Education loans on floating rates are covered. If your loan is on a fixed rate, or was sanctioned before that date, read your loan agreement for any charges.
Simple ways to prepay
- Put part of every annual bonus or salary increase towards the loan.
- Raise the EMI voluntarily when your pay goes up, if your bank allows it.
- Use any refund of a caution or security deposit from the college to cut the balance.
- Before prepaying, keep an emergency fund of a few months of expenses. Do not prepay with money you may need next month.
Tax relief on the interest under Section 129
From 1 April 2026, the deduction for education loan interest sits in Section 129 of the Income-tax Act, 2025, which replaced Section 80E of the 1961 Act. The main rules:
- Only the interest is deductible, not the principal.
- The loan must be for higher education of yourself, your spouse, your children, or a student for whom you are the legal guardian.
- It must be taken from a financial institution (a bank, or a notified institution) or an approved charitable institution.
- The deduction runs for the year you start paying interest and the next seven years, 8 years in total, or until the interest is fully paid, whichever is earlier.
- There is no upper limit on the amount.
- Only individuals can claim, and only the person who actually pays the interest.
- It is available only if you pay tax under the old regime, not under the new default regime.
How it fits the plans above
In the illustration, interest in the first year of EMIs on a ₹15 lakh, 10-year loan comes to about ₹1,45,900. With no upper limit, all of it can be deducted by the person who paid it, if they are on the old regime. How much tax that saves depends on that person’s slab.
Note the timing. The 8-year window starts in the year you start paying interest. If a parent pays interest during the study years and claims it, the clock starts then, so later years of a long loan may fall outside the window. Also check whether the old regime actually works out better for the person paying, because the deduction is lost under the new regime. Whoever claims must be the one paying, so decide early whether the parent or the student will carry the payments in each year.
Key takeaways
- Interest runs during the moratorium (course period plus one year). If unpaid, it usually joins the loan.
- Paying simple interest during study is optional, but in our ₹15 lakh illustration it saves about ₹2,63,600 over 10 years and about ₹4,20,500 over 15 years.
- A 15-year tenure lowers the EMI but raises the total. Take it for flexibility only if you plan to prepay.
- Keep the EMI a modest share of realistic take-home pay. This is a rule of thumb, not a rule.
- Floating-rate loans sanctioned or renewed from 1 January 2026 carry no pre-payment charges.
- Section 129 allows a deduction of interest for up to 8 years, with no upper limit, under the old regime only, for the person who pays.
- Check eligibility for PM-Vidyalaxmi or CSIS interest support before the course starts.
This is general information, not personal financial or tax advice. Terms vary by bank, so confirm the interest method, rate type and charges in your sanction letter before you borrow more.
