Everyone wishes for a financially successful career. The first step in achieving this dream is – graduating from a reputed higher education institute with good scores. But, sadly, achieving this dream requires more than hard work, dedication, and commitment.
In India, higher education costs have been on a steep rise in the last decade. Inflation, an increase in tuition fees, and student accommodation costs make it difficult for parents to fund their children's dream education.
This is where education loans come into the picture.
Overview of Education Loans in India
In India, education loans can be taken either by the student or his/her parent to fund higher education costs. It's available for students who want to pursue higher education in India and students who are looking to go overseas for their college/university. Education loans are offered for UG, PG, and vocational courses as well.
Here are the top salient features of availing an education loan:
Income tax benefits under Section 80E on the interest paid while repaying education loans.
Competitive interest rates – Additionally, female students get additional discounts on interest rates, thereby reducing the overall loan burden. The government also offers subsidies for students from backward castes and tribes while taking an education loan.
Easy availability of the loan at all leading banks and other NBFCs.
Flexible repayment tenure – This is one of the most significant benefits of taking an education loan. Unlike other loans, where the repayment commences immediately on receiving the loan amount, for education loans, the repayment begins only after the student has completed his/her education. Additionally, students also get a moratorium of 6 months to 1 year after completing the course. This period helps students wait until they start earning to repay the loan.
Covers all expenses – Besides covering the cost of tuition fees, education loans also include other miscellaneous expenses incurred by the student like – accommodation costs, book fees, etc.
The amount of loan sanctioned and the interest rate charged varies from lender to lender. It depends on several factors like whether you submit collateral, the credit score of the guarantor, etc.
What happens if I am unable to repay my education loan?
Everyone dreams of getting employed and starts earning right after college/university. Due to factors beyond our control – securing a great job after graduation may not always be possible. An uncertain job market, not finding the right job or failing to clear the course – may prevent you from getting employed right after college.
Alternatively, there are situations where a person loses their job, leaving him/her without a salary to repay the EMI on time. In such scenarios, there is a high probability of defaulting on your education loan.
Like all other loans, failing to repay your education loan EMIs on time, leads to several negative repercussions. From a black mark on your credit report to losing your pledged asset, the consequences of not repaying an education loan are many.
The consequences vary based on the amount taken, type of loan, etc. Let’s understand what happens when you’re unable to repay the education loan in different scenarios.
#1: What happens if I am unable to repay an unsecured education loan?
Generally, when the loan amount is small – usually less than Rs. 4 lakhs – the lender sanctions unsecured education loans. When the loan amount is low, the borrower can take an unsecured education loan – without submitting collateral or requiring a co-signer.
If this is the scenario, the lender initially sends you notices when you don’t repay the EMIs on time. If you do not respond, then the lender considers you as a defaulter. Once you have been classified as a defaulter, your credit score starts to fall rapidly.
When your credit score falls, it becomes challenging for you to secure other loans or credit cards in the future. Unless you repay the outstanding amount and settle all the penalties, your credit score will continue to remain low.
#2: What happens if I am unable to repay an education loan with a guarantor?
Some lenders require a guarantor or co-signer when you apply for an education loan. This is the case when the sanctioned amount is high. Additionally, having a guarantor with a good credit score makes it easy to avail of the mortgage and also helps you enjoy lower interest rates on loans.
If this is the scenario, the lender initially sends warning notices to both you and the guarantor(s). If you both do not respond and commence the repayment, the lender waits for a particular period, before classifying your loan as an NPA (Non-Performing Asset). This affects the credit score and the future borrowing ability of both you and the guarantor.
Additionally, the lender also starts loan recovery procedures that directly impact both the guarantor and the primary borrower.
#3. What happens if I don’t repay an education loan with collateral involved?
Some lenders require the borrower to pledge an asset/collateral when the loan amount is high. Additionally, pledging collateral, even when it isn't required by default, can help you secure a loan at lower interest rates.
If you have availed an education loan by pledging collateral, the repercussions of not repaying it on time can be costly. When you don't repay the EMIs on time, the lender initially sends you notices. If you fail to respond and get the repayment back on track, the lender sends you repeated warnings.
If you don’t respond even after these repeated notices, the loan is classified as an NPA. The lender is then legally entitled to take ownership of the assets/property that you have pledged as collateral. The lender can auction the property/asset to recover the cost of the loan.
Besides losing the property, the borrower’s credit score also takes a hit, making it difficult to secure any loans in the future.
As you can see, failure to repay the education loan can lead to several negative consequences like – drop in the credit score, a black mark in the credit report, and losing the pledged property. Clearly, it's not a good situation for the borrower.
Are there any ways to avoid these negative consequences when you default on the education loan?
Be proactive and communicate with the lender
If you find yourself unable to pay the upcoming EMI on time, you need to be proactive and communicate your situation to the lender. Instead of the lender reaching out to you, reminding you of the missed EMI, you need to initiate the communication with the lender.
Explain your situation. If the lender believes that you're facing authentic financial troubles, they are more likely to restructure the loan repayment schedule. Some lenders even extend the moratorium period until you land a job.
Ask for a temporary postponement of the payment
Deferments allow you to pause the repayment schedule for a specified period. For instance, if you're laid off, you can explain the situation to the lender and ask for deferment until you land another job.
Switch the loan to another lender
If you're stuck in an education loan with high-interest rates, you can transfer it to another lender who offers reduced interest rates. Alternatively, you can convert an unsecured education loan to a secured education loan, which effectively lowers interest rates, thereby bringing down the loan's overall cost.
The education loan is generally the first loan a person takes as they step into adulthood. Hence, it’s a good practice to ensure that you repay EMIs on time to build your credit score and maintain a stellar credit history.
Remember that though lenders are generally lenient when it comes to education loan eligibility, the consequences of defaulting on EMIs are similar to other loans, and its best avoided. Make use of the tips listed here and avoid falling into an education loan debt trap.