Education loan default: Know the consequences

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Education loans are a great tool to propel the career dreams of many into reality even when one does not have the ready money upfront to fund education expenses. However, in the uncertain times that we are passing through it is not surprising if the much-cherished job hasn’t materialised in time and one defaults on the repayment of education loans.

There can also be situations when one loses a job soon after starting one’s career. In these cases, there is a high probability of default.

Like defaults on any other loan, defaulting on education loans, too, attracts some penalty.

Types of education loan

There are mainly three types of education loans. A loan up to Rs 4 lakh is an unsecured loan for which no collateral or guarantor is needed.

Second, when the sanctioned amount is high the lenders need a guarantor to secure the loan.

Third, lenders require the borrower to pledge an asset/collateral when the loan amount is high. Also, ledging collaterals, even when it isn’t required, can help secure a loan at lower interest rates.

Unable to Pay the EMIs

For an unsecured loan, the lender initially sends notices when one doesn’t pay EMIs on time. If the person does not respond, the lender considers the person as a defaulter.

Once someone has been categorized as a defaulter, his/her credit score starts to fall rapidly.

In the second case, the lender sends warning notices to both the borrower and the guarantor. If both the persons do not respond, the lender waits for a particular period, before classifying the loan as an NPA (non-performing asset). This affects the credit score and the future borrowing ability of both persons.

Additionally, the lender also starts loan recovery procedures that directly impact both the guarantor and the primary borrower.

In the third instance, if anyone fails to pay EMIs, the lender initially sends multiple notices. If the person fails to respond and put the repayment back on track, the lender classifies the loan as NPA.

In such a situation, the lender is legally entitled to take ownership of the assets/property that the borrower has pledged as collateral. The lender can auction the property/asset to recover the cost of the loan.

What to do

If you are unable to repay education loan EMIs, don’t hesitate to visit the branch, talk to the manager and explain the situation. If the lender finds your explanation credible, he/she might restructure the loan repayment schedule.

One can ask for a temporary postponement of the EMIs in writing if he/she has been laid off by the company. But don’t try to dodge the notices served by the lender.

Road Ahead

An education loan is generally the first loan a person takes in his/her lifetime. It’s a good practice to ensure that you repay EMIs on time to build a very good credit score and maintain a neat credit history. It will help you in the future as well.

The real scenario

From April to December 2020, the outstanding education loan was Rs 84,965 crore, of which 9.7% is classified as NPA.

According to the data of the State Level Bankers Committee, 9.7% of the education loan i.e. Rs 8,263 crore will not be returned to the banks.

The biggest defaulters are in the nursing and engineering categories.

As per zone-wise data, the NPA of eastern states like Bihar and Bengal stood at 14.2% and in southern states like Tamil Nadu and Karnataka, it was 11.9%. NPAs remained at 3.3% in northern states and 3.9% in western states.