Education loans have a unique feature. That feature is moratorium on interest payments. On home loans, you get a moratorium on principal repayments (Pre-EMI) and not interest payments. Interest must be paid on time. Even for corporate loans, moratorium is typically only for principal repayments. And there is good rationale behind such moratorium on interest payments in education loans.
When the borrower is studying (and not working), there is little chance that he will have money to make any kind of loan payments. Therefore, the bank waits for the borrower to finish his/her studies, find a job and then start paying the loan. The flip side is that the interest keeps getting accrued to the outstanding principal. When you finally start paying loan EMIs, you figure out that the loan outstanding is much larger than the amount you got from the bank (discussed later). Now, this can be a problem for students from Economically Weaker Sections.
In order that such students do not feel the pinch of accrued interest the Central Government had started Central Sector Subsidy Scheme in 2009. Under this, the Central Government takes care of the interest during the moratorium period. In this post, let’s find out more about the Central Sector Interest Subsidy Scheme (CSIS) for education loans.
Central Sector Interest Subsidy Scheme (CSIS): Eligibility
- The student must belong to an Economically Weaker Section. Parental income should be lower than Rs 4.5 lacs per annum.
- For students enrolled in professional / technical courses from institutions
- Accredited by NAAC (National Assessment and Accreditation Council) OR
- Accredited by NBA or institutions of national importance or Centrally funded Technical Institutions (CFTIs) OR
- Other professional institutions approved by respective regulatory body such as Medical Council of India, Dental Council of India, Indian Nursing Council, Bar Council of India etc.
- You can get subsidy just once. Therefore, you can either avail subsidy benefit for undergraduate course or for post-graduate course. You can’t avail for both. You can avail subsidy if you have enrolled for an integrated program (undergraduate and post-graduate),
- Education loan must be taken under IBA (Indian Banks Association) Model Education Loan Scheme. IBA Model Loan Scheme is nothing complex but a simple education loan structure that the banks abide by. For instance, moratorium period under an IBA model loan is Course Period + 1 year. For more on IBA guidelines on Model Education Loan, refer to this document.
As I understand, there is no cap on the eligible loan amount. However, the subsidy shall be extended only for the maximum of Rs 10 lacs. For instance, if you take a loan of Rs 15 lacs, you will get interest rate subsidy for only Rs 10 lacs. For the excess Rs 5 lacs, there won’t be any interest subsidy.
How Central Sector Interest Subsidy (CSIS) Works?
You get interest subsidy during the moratorium period.
Under education loan, students get moratorium on loan repayments. As per IBA model education loan, the moratorium is for Course Period +1 year. However, the interest during the period keeps getting added to the outstanding amount. For instance, if your course duration is 4 years, you will get moratorium for 5 years (4 years + 1 year). During this period, you do not have to pay anything to the bank, but the interest keeps accumulating and gets added to the outstanding principal.
If you take a loan of Rs 2 lacs (let’s say everything is upfront) and the rate of interest is 10% p.a., your loan outstanding would grow to Rs 3 lacs in 5 years. Only simple interest (and not compound interest) is charged during the moratorium period and this interest gets accrued to the outstanding principal. At the end of 5 years, the EMI will be calculated on Rs 3 lacs.
If you are eligible for the subsidy scheme, then the interest during the moratorium period will be taken care of by the Government. Since the Government pays the interest to the bank during the moratorium period, your loan outstanding will remain the same at Rs 2 lacs (and not grow to Rs 3 lacs) at the end of 5 years. This is a very substantial cost-saving for the education loan borrowers.
Interest subsidy under the scheme shall not be extended to students who discontinue their course midway or those who are expelled from the institution on disciplinary or academic grounds. However, interest subsidy will be available if the studies have been discontinued due to medical reasons.
Once the moratorium period gets over, the interest will be to be borne by the borrower.
How to Apply for the Subsidy?
You can apply for the subsidy while making your loan application. Since there is upper cap on the parental income, you are required to furnish an income proof from the authorised public authority of the State Government. You can furnish this proof to the concerned bank branch. If you are using VidyaLakshmi portal to make your education loan application, you can apply for subsidy from the website too.
Additional Reading
- Central Sector Subsidy Scheme (CSIS) Guidelines
- Canara Bank CSIS FAQs
- Education Loan Interest Subsidy page on State Bank of India website