Income-Linked Repayment for Education Loans: How It Works and Where India Stands

Income-Linked Repayment for Education Loans: How It Works and Where India Stands

Most students graduate into a salary that is smallest at the point when the first instalment is due. A fixed monthly payment ignores that. Income-linked repayment tries to fix it by tying what you pay each month to what you earn: a small salary means a small payment, and a larger salary means a larger one.

The idea of income-linked repayment is popular in countries that run government student loans, and it comes up often in discussions about India. The useful question about income-linked repayment is not whether it sounds fair, which it does, but how it works, what it costs and what Indian borrowers can actually get today.

What is income-linked repayment?

Under a typical income-linked repayment plan, the monthly payment is a percentage of income above a set threshold, not a fixed instalment. Nothing is due when income is below the threshold. The payment rises as income grows.

This is different from the equated monthly instalment (EMI) that Indian lenders use. An EMI is the same amount every month for a fixed term, whatever the borrower earns. It is predictable, but it can feel heavy when income is low and trivial when income is high.

The two models also deal with risk differently. An EMI loan leaves the borrower with the risk of low earnings. An income-linked plan moves part of that risk to the lender or the government, which is why it often needs either a long term, a write-off at the end or public money behind it.

How does income-linked repayment work in the United Kingdom?

The UK is a clear example because the rules are published. On its page about repaying a student loan, the UK government says borrowers on the main plans repay 9 percent of income above a threshold, and those on a postgraduate loan repay 6 percent. The yearly thresholds differ by plan: £29,385 for Plan 2, £25,000 for Plan 5 and £21,000 for the Postgraduate Loan.

A quick illustration shows the effect. A borrower on Plan 5 earning £30,000 a year has £5,000 above the threshold, so the yearly repayment is 9 percent of that, or £450, about £37.50 a month. A borrower earning less than £25,000 repays nothing under that plan. On Plan 2, with its threshold of £29,385, a salary of £35,000 leaves £5,615 above the line, and 9 percent of that is about £505 a year, or roughly £42 a month.

These are the government's own student loans, and a student from India on a Student visa should not assume access to them. They are useful here only as a picture of how an income-linked repayment plan is built.

What do Indian education loans offer today?

Indian lenders mostly use fixed-term EMIs after a moratorium, and income-linked repayment is not part of the standard design. The model scheme of the Indian Banks' Association (IBA), hosted on Canara Bank's website, sets the moratorium at the course period plus one year and repayment in EMIs for up to 15 years after that.

How heavy is a fixed EMI on a starting salary?

A fixed EMI is easy to plan around, but it can take a large slice of an early salary. Using the same assumed loan of ₹20 lakh at 10 percent over ten years, the EMI is about ₹26,430. These are illustrative figures, not a quote.

• On a monthly salary of ₹40,000, the EMI takes about 66 percent
• On ₹80,000, it takes about 33 percent
• On ₹1.2 lakh, it takes about 22 percent

The same loan is a very different burden on each salary, and the gap is what income-linked repayment tries to close. Salary here means pay before tax, so the pressure on take-home income is higher than the percentages suggest.

Do any Indian loans respond to job timing?

There is one feature that does. SBI's Scholar Loan scheme starts EMIs 12 months after the course or six months after getting employment, whichever is earlier. That ties the start date to a job, but it does not make the repayment income-linked, because the amount does not follow income. Once the EMI begins, it is fixed.

The lender pages of SBI, ICICI Bank, Axis Bank and Credila do not describe a product where the monthly payment moves with salary. Several advertise flexible repayment options, so a family should ask what that phrase means in writing, plan on fixed instalments and treat anything advertised as income-linked with caution.

Is India moving towards income-linked repayment?

There is a policy signal, though not yet a scheme. In a report submitted on 9 December 2025, Parliament's Standing Committee on Education, Women, Children, Youth and Sports reviewed education loan schemes. According to PRS Legislative Research's summary, the committee recommended allowing repayment models with income-based instalments, provided they do not raise non-performing assets at the banks that lend. It also recommended raising the moratorium under government schemes from one year to two.

A committee recommendation for income-linked repayment is not law or a bank rule. It shows where the discussion is, and it explains why the safeguard on bad loans is part of the proposal. A lender will not offer income-linked repayment unless it can see how the money comes back.

Why is linking payments to income hard to design?

The main difficulty is arithmetic. Interest does not wait for salary. Take a loan of ₹20 lakh at 10 percent a year. The interest alone is about ₹16,667 a month. These are illustrative figures with an assumed rate, not a quote.

Now suppose a hypothetical plan took 10 percent of monthly income:

• A salary of ₹40,000 gives a payment of ₹4,000, which is less than a quarter of the monthly interest
• A salary of ₹80,000 gives ₹8,000, which is still about half
• Only at about ₹1.67 lakh a month would the payment cover the interest

In the early years, then, the balance would keep growing even though the borrower is paying every month. The fixed EMI over ten years is about ₹26,430, and it clears the loan in a decade. A plan for income-linked repayment that charges less in the early years needs a long term, a cap on total interest or a write-off at the end, and each of those has a cost that someone else must carry.

This also explains a safeguard in the Reserve Bank of India's rules. For floating-rate loans paid in EMIs, its circular on rate resets says that stretching the tenor must not lead to negative amortisation, which is the situation where the balance grows even though payments are made.

What are the benefits and risks of linking payments to income?

The benefits of income-linked repayment are easy to see. Payments shrink when the job market is weak, so the borrower is less likely to default. It can make a field with modest starting pay look more affordable. And it gives families a reason to borrow for a course they believe in, without fear that a slow first year will turn into a missed payment.

The risks are just as real. The total cost can be higher, because a slower repayment means interest runs longer. Income has to be verified every year, and that takes paperwork and trust. Lenders that carry the risk will price it into the rate or restrict the plan to certain courses. And there is no guarantee that the borrower, even after many years, repays everything, which is why public money or a write-off is often part of such plans.

What can families do now?

Until income-linked repayment exists in India, there are ways to get some of the same breathing room within the current system:

1. Choose the schedule with care. Ask how long the moratorium is, and whether it ends early on getting a job.
2. Ask whether interest can be paid during the course. Paying it keeps the starting balance lower.
3. Pick a tenor that keeps the EMI affordable on a realistic starting salary, then check the total interest cost.
4. Look into government schemes with interest subvention during the moratorium, if the family qualifies.
5. Write down what will happen if the job search takes longer, and who to call at the lender if it does.

Mistakes to avoid when comparing loans

• Assuming that income-linked repayment means a smaller total cost
• Comparing monthly payments without comparing the final amount repaid
• Treating a committee recommendation as a scheme that is already open for applications
• Ignoring the interest that accrues while a payment is small
• Believing an advertisement for an "income-based" loan without seeing the written repayment schedule

Common questions about income-linked repayment

Is income-linked repayment available for Indian education loans?

Not as a product. The pages of SBI, ICICI Bank, Axis Bank and Credila do not describe payments that move with salary, although some advertise flexible repayment options. A parliamentary committee has recommended allowing such models.

Does income-linked repayment lower the total cost?

Usually not. It lowers early payments, but the balance stays outstanding for longer, so the total interest is often higher.

Could income-linked repayment apply to existing loans?

It would depend on a lender's policy or a change in rules, and for now no such arrangement is described in the standard scheme.

What is the closest option today?

A longer moratorium, a longer tenor or a start date linked to a job. Each is a fixed schedule agreed in advance, not one that adjusts with income.

FundMyCampus is an education loan advisory platform founded by an alumnus of the Indian Institute of Management Bangalore. It is not a bank, and its website says it does not charge students any fee. Its free EMI calculator and loan comparison tool let families test how different tenures change the monthly instalment.

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