An education loan can quietly grow while you study. Interest keeps running during the course, and many lenders add it to the loan before your first EMI (equated monthly instalment). This guide shows where the cost comes from and the practical ways to bring it down: paying interest early, asking for concessions, switching lenders, prepaying and claiming the tax deduction.
How is an education loan interest rate set?
Bank education loans are often on a floating rate. That means the rate is linked to a benchmark and moves when the benchmark moves. Since October 2019, banks have had to link new floating-rate retail loans to an external benchmark lending rate (EBLR), which is often the RBI repo rate (the rate at which RBI lends to banks). SBI, for example, says its education loan rates are linked to its external benchmark rate and float for the full loan period. The bank adds a spread on top, which depends on the loan type, amount, collateral and the student's profile.
Two published examples, as of October 2026:
- SBI (rates effective 15 October 2026): its external benchmark rate is 8.15% (repo rate 5.50% plus 2.65%). Its Student Loan is listed at 10.15% without collateral (up to ₹7.50 lakh) and 9.65% with collateral (above ₹7.50 lakh), and the page lists a 0.50% interest concession for girl students.
- Union Bank of India (effective 8 October 2026): EBLR is 8.25% (repo 5.50% plus 2.75%). Its study loan rates are 10.25% for male and 9.75% for female students up to ₹7.50 lakh, and 10.00% and 9.50% above ₹7.50 lakh.
RBI raised the repo rate by 0.25 percentage points to 5.50% on 7 October 2026. So a repo-linked education loan may see its rate rise at the next reset. Rates change often; check the lender's current rate page.
What happens to interest during the moratorium?
The moratorium (also called the repayment holiday) is the period when you do not pay EMIs. SBI's Student Loan page, for example, lists a repayment holiday of the course period plus 12 months.
Interest still builds up during this time. SBI says the interest accrued during the course and moratorium is added to the principal, and EMIs are then fixed on the bigger amount. It also says that if the full interest is paid before repayment starts, the EMI is fixed on the principal only.
Whether the build-up is calculated as simple interest or compounded differs by lender. Read your sanction letter, or ask the branch in writing.
How much does paying interest during the course save?
Say you borrow ₹10,00,000 at an example rate of 10% a year. To keep the maths simple, assume the full amount is paid out on day one (in real life it is usually paid in instalments). The course is 2 years, plus a 1-year moratorium, so EMIs start after 36 months and run for 120 months.
The EMI formula is: EMI = P × r × (1 + r)^n ÷ [(1 + r)^n − 1], where P is the loan amount, r is the monthly rate (yearly rate ÷ 12 ÷ 100) and n is the number of months.
| A: Pay nothing (simple interest added) | B: Pay interest monthly during study | C: Pay nothing (monthly compounding) | |
|---|---|---|---|
| Paid during the 36 months | ₹0 | ₹8,333 a month (₹3,00,000 in all) | ₹0 |
| Loan when EMIs start | ₹13,00,000 | ₹10,00,000 | ₹13,48,182 |
| EMI for 120 months | ₹17,180 | ₹13,215 | ₹17,816 |
| Total of all EMIs | ₹20,61,551 | ₹15,85,809 | ₹21,37,959 |
| Total you pay | ₹20,61,551 | ₹18,85,809 | ₹21,37,959 |
Paying the interest as it builds up (B) costs about ₹1.76 lakh less in total than option A, and the EMI is ₹3,965 lower. If the family can afford even part of the monthly interest, ask the lender how part-payments during the moratorium are treated.
Can you get a government interest subsidy?
A Government of India note dated 29 July 2026 describes two schemes run through the PM-Vidyalaxmi portal:
- PM-Vidyalaxmi: 3% interest subvention during the moratorium on loans up to ₹10 lakh, for students admitted on merit to listed quality institutions, with family income of up to ₹8 lakh a year, as per the note. It is limited to one lakh students a year, and students getting other scholarships, interest subvention or fee reimbursement are not eligible.
- PM-USP CSIS: full interest subvention during the moratorium on loans up to ₹10 lakh, for technical or professional courses, with family income up to ₹4.5 lakh.
Eligibility rules are detailed. Check the official note and ask your bank before you count on either scheme.
What are the ways to get a lower rate?
- Ask for published concessions. Some banks publish lower spreads for girl students, as in the SBI and Union Bank examples above. Check that yours is applied.
- Ask for a review once you start earning. A steady salary and clean repayment record may help. Lenders decide, but a written request costs nothing.
- Check your benchmark. Older loans may still be linked to MCLR or base rate. Ask whether moving to the bank's current repo-linked rate would lower your rate, and what fee applies.
- Ask whether collateral lowers your rate. At SBI, for example, the Student Loan rate with collateral (above ₹7.50 lakh) is lower than the rate without collateral.
- Switch lenders. SBI, for example, publishes separate takeover rates for education loans above ₹10 lakh with collateral.
When does switching an education loan pay?
Say you owe ₹12,00,000 at 11.5%, with 96 months left. Another lender offers 9.75%. The EMI falls from ₹19,175 to ₹18,051, a saving of about ₹1,124 a month, or about ₹1.08 lakh over the remaining term.
If the new lender charges, say, 0.5% processing plus 18% GST, that is ₹7,080. It pays back in about 6 to 7 months. But a takeover may also need collateral, property valuation, legal checks and stamp duty, so ask for every charge in writing before you apply.
Will you pay a charge to prepay or close the loan?
Under RBI's Pre-payment Charges on Loans Directions, 2025, regulated lenders cannot levy pre-payment charges on floating-rate loans to individuals for purposes other than business, sanctioned or renewed on or after 1 January 2026. This applies whatever the source of the money and with no minimum lock-in. An education loan is normally a non-business loan, but the Directions do not name it, so confirm in your Key Facts Statement (KFS).
For fixed-rate loans, charges follow the lender's policy and must be disclosed in the sanction letter, loan agreement and KFS. For older loans, check your own terms.
Can you claim a tax deduction on education loan interest?
Yes, under the old tax regime, within limits set by law. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. The deduction that was section 80E is now section 129 of the new Act. In short:
- Only an individual can claim it, for interest paid on a loan taken for the higher education of self, spouse, children, or a student for whom the individual is the legal guardian.
- The loan must be from a bank or other financial institution notified by the government, or an approved charitable institution.
- There is no rupee cap on the interest. It is allowed for the tax year in which you start paying interest and the next seven tax years, or until the interest is fully paid, whichever is earlier.
- It is for interest you actually pay, not for interest added to the loan.
Under the new regime, section 202 disallows Chapter VIII deductions except a few listed ones, and this deduction is not among them. If you switch lenders, check that the new lender is an eligible institution. For your own case, ask a tax adviser.
Do it in 10 minutes, free
Use the LowerMyEMI balance transfer calculator to see whether moving your education loan to a lower rate saves money after fees, and export the result to Excel or PDF.
Then LowerMyEMI can write one email per lender asking for a better rate, and a letter to your current lender asking it to review your rate. You send them from your own email. We are not a lender and never promise a rate; each lender decides.