Loan for Education

Understanding the Interest Rates on Education Loans

By Tata Capital
27 January 2026
9 mins read
2321

Pursuing quality education lays the solid foundation for a successful and financially secure future. However, the rising cost of studying in well-ranked universities and colleges often presents financial challenges. To cover these educational expenses, many students choose education loans.

But, does an education loan have interest rates and terms that can potentially affect your repayment capacity? To answer this question, let’s start with understanding how interest rates work. This article will take you through the specifics of interest rates associated with education loans so you can understand the fine print and, ultimately, make an informed decision.

Does an education loan have interest?

Yes, all types of loans feature an interest component. The interest rate is the percentage of the loaned amount the lender charges as the cost of borrowing. This rate is calculated on an annual basis. For example, if you take a loan of INR 10 lakhs at an interest rate of 12% per annum, you will have to repay an additional INR 1.2 lakhs in interest along with the original principal amount of INR 10 lakhs.

How is the interest rate calculated for education loans?

To understand how interest rates work, it is important to answer the question: “Does an education loan have interest rates that can change?”

Education loans can feature either a fixed or a floating interest rate. While floating interest rate changes with shifting market conditions, fixed rates stay constant throughout the tenure of the loan. Typically, education loans are offered at a floating rate.

Additionally, a lender may calculate interest based on simple or compound interest calculation.

In either case, the calculation will be as follows:

1. Simple interest calculation on education loans

Simple interest is calculated on the principal amount of the education loan. It is calculated using this formula:

Simple Interest = Principal x interest rate x time period

For example, if the loan amount of INR 1 lakh is disbursed for a tenure of 3 years at a 10% simple interest rate, the interest calculation will be:

INR 1 lakh x 10% x 1 year = INR 10,000

Year 2 interest = INR 1 lakh x 10% x 1 year = INR 10,000

2. Compound interest calculation on education loans

Lenders calculate compound interest on the principal amount and the accumulated interest. It is calculated as:

Compound interest = Principal x (1 + interest rate/ compounding rate) ^ compounding rate x tenure

Say, you’ve taken a loan of INR 10 lakhs for 2 years with an interest rate of 7%. The calculation will then look like this:

10 lakhs* (1 + 0.07/1) ^ 1*2 = INR 10,14,049

Thus, your total interest obligation for the loan’s tenure will stand at INR 14,049.

Do student loans have interest payments during grace period?

Unlike other types of loans, education loans feature a grace period – the time between the end of the course and the start of the loan repayment. This means that you don’t need to start paying EMIs immediately but at a later date once you start to earn. A common question while selecting a lender is, “Does an education loan have interest to be paid during the grace period?” Well, there are two types of grace periods offered by different lenders:

1. Grace period with interest payment: Under this option, the borrower needs to pay interest on the disbursed loan amount, either fully or partially. The principal repayment starts only after the grace period is over.

2. Grace period without interest payment: Here, the borrower is not required to pay any interest during the grace period. The interest keeps accumulating and gets added to the principal once the grace period ends.

Does an education loan have interest-based tax benefits?

Apart from helping you move ahead in your career, education loans also help you with tax benefits. The interest paid on education loans is eligible for tax deduction under Section 80E of the Income Tax Act.

Here is how it works:

1. The tax deduction applies only to interest payments, not to the principal loan amount. Moreover, there is no upper limit on the total interest amount eligible for tax deductions.

2. The tax benefit on education loans is available for up to 8 years from the start of loan repayment or until interest is paid off, whichever is earlier.

3. To claim this deduction, a certificate is required from the lender showing interest and principal breakup of EMIs.

Fixed vs floating interest rates: Which should you choose?

Choosing between fixed and floating interest rates affects both your EMIs and total loan cost. Knowing the difference helps you pick the option that fits your financial comfort.

Basis	Fixed interest rate	Floating interest rate
Meaning	Interest rate remains constant throughout the loan tenure.	Interest rate changes with market benchmarks.
EMI stability	EMIs remain the same, making budgeting easier.	EMIs may rise or fall over time.
Risk factor	Low risk from interest rate fluctuations.	Higher risk due to changing market rates.
Initial rate	Usually slightly higher initially.	Often lower at the start.
Benefit during rate cuts	No benefit if rates fall.	Borrowers benefit directly from rate reductions.
Best suited for	Those who prefer certainty and fixed budgets.	Those comfortable with some uncertainty.
Long-term cost	Can be higher if rates drop significantly.	Can be lower if rates remain stable or decline.

Choose fixed for stability; opt for floating if flexibility matters.

How do lenders decide your education loan interest rate?

Lenders in India use multiple factors to decide your education loan interest rate, and knowing these can help you plan better. To understand how education loan interest works, lenders first evaluate the risk involved in lending to you.

A major factor is the co-applicant’s profile. Stable income, employment history, and a good credit score often lead to lower student loan interest rates. Next comes the student’s academic background. Admission to reputed institutions or high-demand courses reduces risk and can lower education loan interest.

The loan amount and security also matter. Higher amounts and unsecured loans usually carry higher education loan interest rates, while collateral-backed loans are cheaper. Lenders also assess the course location, as overseas education loans often attract higher student loan interest rates.

Finally, loan tenure, moratorium period, and market-linked base rates influence how education loan interest is calculated. Understanding these factors improves your chances of better terms.

Comparing interest calculation methods: Simple vs compound

Understanding how interest is calculated on loans can help you manage costs and plan repayments better. Education loans may use simple or compound interest, each affecting your education loan interest differently.

Basis	Simple Interest (SI)	Compound Interest (CI)
Meaning	Interest is calculated only on the principal.	Interest is calculated on principal + accumulated interest.
Formula	SI = P × R × T / 100	CI = P × (1 + R/n)^(n×T) – P
Interest growth	Linear over time.	Exponential over time.
EMI impact	Lower for short-term loans.	Higher due to interest on interest.
Best suited for	Short-term loans or small amounts.	Long-term loans where growth on interest is manageable.
Transparency	Simple and predictable.	Complex; requires careful monitoring.

Knowing this helps manage student loan interest rates efficiently.

Is interest rate important while comparing lenders?

Education loans provide the required financial assistance for higher studies. A common question students ask when exploring different financial institutions is: Do student loans have interest rates that vary across lenders?

Understanding whether a financial institution offers low-interest student loans can have huge implications on your total repayment burden. In addition to finding student loans with low interest rates, ask questions about the prepayment charges, hidden charges and the total loan amount that can be borrowed.

Finally, it is important to note that with longer tenures, your EMIs reduce but the total interest payable increases. If you are confident of securing a well-paying job after the completion of your course, it is better to opt for shorter tenures. While this would mean slightly higher EMIs, you will be able to repay your loan quicker. However, to make the right decision, strike a balance between your repayment capacity and the tenure.

Tips to get the lowest student loan interest rate in India

Getting the lowest education loan interest rate starts with knowing how does education loan interest work and making informed choices early. Small steps can significantly reduce education loan interest over time.

Here are practical tips to secure lower student loan interest rates:

Compare lenders carefully: Different lenders and financial institutions offer different student loan interest rates, so always compare before applying.

Have a strong co-applicant: A co-applicant with stable income and good credit improves eligibility for a lower education loan interest rate.

Maintain a good credit score: Higher scores often attract better student loan interest rates.

Opt for collateral if possible: Secured loans usually come with reduced education loan interest.

Choose recognised institutions: Loans for reputed colleges often have preferential rates.

Look for subsidies and schemes: Government schemes can help offset education loan interest.

Negotiate charges: Lower margins or waived fees can reduce overall loan cost.

Conclusion

In conclusion, understanding how does education loan interest work is crucial for managing your finances effectively. Being aware of the education loan interest rate and factors affecting it helps you compare offers and choose the best option. By evaluating student loan interest rates across lenders, considering fixed or floating options, and understanding the difference between simple and compound interest, you can reduce your overall repayment burden. A clear grasp of education loan interest not only allows better planning during your studies but also ensures smoother repayment after graduation, making your loan experience more manageable and cost-effective.

Apply for flexible education loans with Tata Capital

Education loans are an excellent way to finance your higher education without straining your finances. With Tata Capital, you benefit from competitive interest rates, an easy online application process, and zero prepayment charges on education loans. We offer loans that can cover your tuition fees, boarding expenses, accommodation expenses, stationary, and other costs. Apply now for an education loan with Tata Capital to move closer to your dream institution!

Apply for Education Loan

FAQs

What is the current education loan interest rate for medical students in India?

The education loan interest rate for medical courses in India usually depends on the lender, loan amount, collateral, and whether the loan is secured or unsecured, affecting total repayment.

How is education loan interest calculated by banks and NBFCs?

Financial institutions and lenders calculate education loan interest based on the principal, tenure, and type of rate - fixed or floating. Understanding how does education loan interest work helps students plan EMIs and total repayment effectively.

Are interest rates higher for unsecured education loans in India?

Yes, student loan interest rates are typically higher for unsecured loans because lenders take more risk without collateral. Secured loans, backed by property or assets, often offer lower interest rates and better repayment flexibility.

Can students switch from floating to fixed loan interest rates?

Many lenders allow borrowers to switch from floating to fixed rates. Doing so changes how education loan interest works, stabilises EMIs, and helps manage repayment based on market fluctuations and personal financial planning.

What should medical students look for to secure the best interest rate on an education loan?

To get the lowest education loan interest rate, students should maintain a strong co-applicant profile, a good credit score, choose reputed institutions, and explore government-subsidised schemes or lender offers.

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