Tata Capital > Blog > Loan for Education > Understanding the interest rates on education loans
02 November 2026
14 mins read
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Summary
Education loan interest rate is the charge lenders add over and above the borrowed money. It is the actual cost of borrowing. Depending on the lender’s policies, your credit profile, chosen course and institution, and other factors, the rate of interest on education loans can range from 8% to 15%. The interest rate can be fixed or floating. The calculation of the interest component can be done using the simple or the compound interest method. Most student loans include a grace period while you are studying, but the education loan interest continues to accrue.
Education loan interest rate refers to the extra charge you pay to lenders on top of the principal amount you borrow to fund your higher education.
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 the meaning of education loan interest rate and how it works. Education loan interest rate refers to the additional percentage charge lenders levy on top of the borrowed money. It generally ranges from 8% to 15% per annum, depending on the lender.
This article will take you through the specifics of interest on education loans so you can understand the fine print and, ultimately, make an informed decision.
Yes, all types of loans feature an interest component. The education loan 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 Rs. 10 lakh at an interest rate of 12% per annum, you will have to repay an additional Rs. 1.2 lakh in interest along with the original principal amount of Rs. 10 lakh.
As shown in the above example, the education loan interest rate directly affects the total amount you repay on an education loan. A higher interest rate results in higher EMIs and a larger total repayment, while a lower interest rate reduces both your monthly installments and the overall cost of the loan. Even a small difference in the interest rate can significantly affect the total amount repaid, especially for long loan tenures. Make sure you compare interest rates across lenders to help you reduce your overall borrowing cost.
To understand how education loan interest rates work, it is important to answer the question: “Does an education loan have interest rates that can change?”
Yes. 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. Since most education loans in India are linked to external benchmark rates, floating interest rates are more commonly offered.
Education loan interest rates in India generally range between 8% and 15% per annum. It depends on factors such as the lender’s policies, applicant’s credit profile, loan amount, course, institution, and whether collateral is provided. For example, if you are pursuing a professional course at a reputed institution with collateral, you may qualify for a lower interest rate than your friend who is pursuing a diploma and securing an unsecured loan.
The following table highlights the features of fixed and floating interest rates to give you a better understanding.
| Fixed interest rate | Floating interest rate |
| EMI remains the same throughout the tenure | EMI or tenure may change when interest rates change |
| Easier to plan monthly repayments | Can benefit if market interest rates fall |
| Protects against rising interest rates | May become expensive if interest rates increase |
| Usually starts at a slightly higher rate | Generally offered at lower initial rates |
Lenders may calculate education loan interest using simple interest during the moratorium period and switch to compound interest once repayment begins. However, the method depends on the lender’s loan terms.
In either case, the calculation will be as follows:
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 Rs. 1 lakh is disbursed for a tenure of 3 years at a 10% simple interest rate, the interest calculation will be:
Rs. 1 lakh x 10% x 1 year = Rs. 10,000
Year 2 interest = Rs. 1 lakh x 10% x 1 year = Rs. 10,000
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 Rs. 10 lakh for 2 years with an interest rate of 7%. The calculation will then look like this:
10 lakh* (1 + 0.07/1) ^ 1*2 = Rs. 10,14,049
Thus, your total interest obligation for the loan’s tenure will stand at Rs. 14,049.
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 | Results in comparatively lower EMIs and lower total repayment, especially for shorter-duration loans. | Leads to higher EMIs or a higher total repayment over the loan tenure, especially for longer-duration loans. |
| Total repayment | Lower overall borrowing cost since interest is charged only on the principal | Higher overall borrowing cost as interest keeps accumulating on unpaid 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 |
| Example | You borrow Rs. 10 lakh at an interest rate of 10% per annum for 5 years. Simple interest is calculated only on the principal of Rs. 10 lakh. It is estimated to be Rs. 1 lakh per year, and Rs. 5 lakh by the end of the tenure. So, total repayment is Rs. 15,00,000. | You borrow Rs. 10 lakh at an interest rate of 10% per annum for 5 years. The interest in the first year will be Rs. 1 lakh, which will compound, requiring you to calculate interest on Rs. 11 lakh for the next year. At the end of 5 years, the total interest will be around Rs. 6,10,510, with the total repayment cost reaching Rs. 16,10,510. |
Knowing this helps manage student loan interest rates efficiently.
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.
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.
In India, education loan interest rates are influenced by factors such as the Reserve Bank of India (RBI) policy rates, lender funding costs, inflation, and market conditions. Most lenders offer floating interest rates, so your rate may increase or decrease during the loan tenure. Currently, education loan interest rates generally range between 8% and 15% per annum, depending on the lender and your profile.
The current education loan interest rate trends in India are as follows:
The Government of India offers several schemes to make higher education more affordable. These schemes mainly provide interest subsidies or easier access to education loans for eligible applicants.
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:
Apart from helping you move ahead in your career, you have the option of enjoying tax benefits on education loan interest. The interest paid on education loans is eligible for tax deduction under Section 80E of the Income Tax Act.
Here is how it works:
Here’s an example to help you get a better understanding:
You have taken an education loan of Rs. 10 lakh for your higher education. The total interest you paid in a year was Rs. 90,000, and the total principal repaid was Rs. 1.2 lakh. Section 80E allows you to claim the interest component for a tax deduction. As a result, you can deduct Rs. 90,000 from your taxable income, provided you are filing the return under the old regime, before calculating the payable taxes.
Education loans provide the required financial assistance for higher studies. A common question students ask when exploring different financial institutions is: Are student loan interest rates different across lenders?
Understanding whether a financial institution offers lower student loan interest rates can have huge implications on your total repayment burden. In addition to finding student loans with low interest rates, you must 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.
It is crucial to compare lenders on student loan interest rates. But there are several other factors you must evaluate before deciding on a lender and applying for the loan. Here’s a quick checklist:
Getting the lowest education loan interest rate starts with knowing how education loan interest works 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:
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, stationery, and other costs. Apply now for an education loan with Tata Capital to move closer to your dream institution!
In conclusion, understanding how education loan interest works 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.
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.
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.
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.
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.
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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