A worked example: ₹10L loan, 9.5%, 3-year moratorium, 10-year repayment
A ₹10,00,000 education loan at 9.5%, with a 3-year moratorium before repayment starts, accrues ₹3,28,270.60 in interest during that moratorium — growing the principal to ₹13,28,270.60 before the first EMI is even calculated. Repaying that grown principal over 10 years gives a monthly EMI of ₹17,187.50, with a total repayment of ₹20,62,500.
The formula: moratorium interest capitalizes into principal first
Interest during the moratorium compounds monthly and is added (capitalized) into the principal at the end of the moratorium — the EMI is then computed on this larger, grown principal using the standard reducing-balance formula, not on the original amount borrowed.
Why the moratorium period matters so much
A moratorium — typically course duration plus a 6-12 month grace period — exists so students aren't required to make loan payments while still studying. But because interest keeps accruing (and compounding monthly) throughout that period, a longer moratorium directly increases the principal the EMI ends up being calculated on.
Why some lenders offer an alternative
Many lenders let borrowers pay interest-only EMIs during the moratorium instead of letting it capitalize — this avoids growing the principal, though it does mean making payments during a period the moratorium was meant to provide relief from. Whether this option reduces total cost depends on the specific lender's terms.
What "true cost" means here
The ₹20,62,500 total repayment substantially exceeds the original ₹10,00,000 borrowed — not just from ordinary interest over the repayment period, but because the moratorium interest was folded into the principal first, meaning interest accrues on interest that was never actually disbursed as new money.