The thought of "what would happen if for some reason you couldn't pay back your education loan to the lender" must have crossed your mind once. 

Obviously, a student would never want to be in such a position themself because when a student considers taking a study loan abroad, they always have an intention of paying back the full amount with interest. But still, the question arises every now and then which is why we are writing this article to give you a proper picture of what really happens when someone delays their EMIs by 1 to 3 months or can't pay back their abroad education loan altogether. Keep reading to know everything about the consequences of not being able to repay your education loan. 

What is Education Loan Repayment? 

Education loan repayment is the method of paying back the cash borrowed from a bank or loan institution to finance higher education costs. After finishing the course, you begin this repayment process six months to one year later, during the moratorium period. At this point, students don’t have to pay, giving them a grace period to find a job or get their finances in order. Depending on the bank, repayment plans differ and a borrower is offered repayment terms that suit his or her financial situation. 

Each lender may have different repayment policies with the ability to choose income-driven plans, which base monthly payments on income levels, as well as loan tenure extensions so borrowers have flexibility. Repayment policies that the lender offers will help you to better understand these options and chart your way through the repayment journey. If you’re interested in different repayment strategies then you can read our blog on education loan repayment.

Education Loan Repayment and Moratorium Period

The grace period of the moratorium period is one of the most important parts of loan education. The study duration plus another six months to one year is the period during which students study get a job, and then repay the loan.

However, loan policies vary by lender:

  • Government Banks: They usually do not need to pay anything during the moratorium period because they are pledging collateral, like property.
  • Private Banks and Non-Banking Financial Companies (NBFCs): These are unsecured loans that mean the lender is taking more risk, so often require partial or full interest payments during the moratorium period.

You get a no-payment moratorium period with public banks since they give you an education loan on collateral, their risk is low compared to private banks and NBFCs, who mostly give an education loan without collateral, thus they ask for a payment of full or partial interest during the moratorium period. 

So during a moratorium period, you either pay a partial interest, full interest, or nothing at all. Once this period ends, that's when the lender based on how much amount you have disbursed from the sanctioned loan amount generates your EMIs and loan amortization schedule.

Selecting a Repayment Tenure

The choice of repayment tenure is important — and can influence your financial flexibility. Students often assume that they’ll be able to pay off their loans quickly after graduation with a high-paying job. But it’s smart to prepare for the worst-case scenario, not finding a job as quickly as planned or earning less than you’d hoped.

  • Suggested Repayment Tenure: The period selection (e.g. 10 years) is advisable and government banks can offer up to 15 years. It can lower the monthly EMI burden, and help you adjust finances.
  • Pre-Closure Option: Most banks offer to close the loan early, called pre-closure, without penalty in government banks if you are in a better financial position. Private banks and NBFCs, however, can impose a 6 month lock-in period and pre-closure charges from ₹2,000 to ₹4,000.

Understanding Part Pre-Payment and Pre-Closure

During the repayment phase, you may consider options such as:

  • Part Pre-Payment: When a borrower pays a lump sum to reduce the principal, this is when. Let’s say that when you get a signing bonus from an employer you can use it to make a partial prepayment. It may cut down your EMI or the loan tenure.
  • Pre-Closure: It is an option in which you can repay the amount of the whole loan before the end of the original tenure. Pre-closure without charges is usually allowed by government banks but private banks and NBFCs have their own terms and apply pre-closure charges.

Consequences of not repaying your Education Loan

Depending on how long or hard the education loan was defaulted on, failure to repay can be different. Here’s what the recovery process looks like:

EMI Delays and Impact on Credit Scores:

  • Reporting delayed payments to credit bureaus can seriously harm your credit score, as banks report any delayed EMI payment up to 30 days.
  • Over 30 days of this delay also leads to further penal interest charges (usually 2% per annum in government banks, higher in private banks and NBFCs).

Non-Performing Asset (NPA) Status:

  • In case of EMI nonpayment beyond 90 days, the loan is considered a Non-Performing Asset (NPA). The borrower’s credit report is damaged by this status and borrowing in the future will be difficult.

Soft Recovery Measures:

  • If the bank has already made a recovery, it contacts the borrower and co-applicant at the early recovery stage which is called 'soft recovery'. Phone calls and warning letters could be included in this.
  • For loans that are collateral-based, government banks are generally more lenient. However, the risk of unsecured loans makes private banks and NBFCs more assertive. 

Hard Recovery Measures:

  • The lender allows soft recovery efforts, but if they fail, the bank goes ahead with what is known as 'hard recovery' and can be started after 3 to 10 months of missed payments.
  • Hard recovery for government banks may mean issuing a final notice before auctioning the collateral property. A last chance is given to the borrower to repay; extra from the sale is returned to the borrower.
  • In such a situation, private banks and NBFCs may begin recovery efforts, including a trip to the borrower’s residence or use of the signed blank cheque.

We have provided an even clearer explanation for soft recovery, hard recovery, part pre-payment and post closure down below. Keep reading to know more. 

International Lenders and Reputation Consequences:

  • The borrower’s defaulting might possibly impact his professional or academic reputation with the university or employer. Indian banks and NBFCs generally do not do it.

How to mitigate the risk of being a defaulter 

Planning ahead on how you are going to pay back the loan amount is as important as your choosing the right lender for your education loan. WeMakeScholars an organization funded and supported by the Ministry of IT Government of India not only helps you get a study loan for abroad but will also guide you if ever you face any issue in the future. 

Repayment tenure selection

  • So while taking an education loan, students are positive that they are gonna repay their loan in no time but the reality hits them when they actually start repaying. Students assume that they will get an 80 lakhs package after completing their master's from the US and a 60 lakhs package after completing their master's from Canada and so to close an education loan of some 40-50 lakhs shouldn't take more than 2-3 years.
  • But students should take into consideration the worst-case scenarios as well, like what if you lose your job, if your package is less, or if it took you longer than expected to get a job. This is why we as WeMakeScholars tell our students to always opt for at least 10 years of loan repayment tenure.
  • Government banks give students 10 years of repayment tenure which can also be stretched to up to 15 years, but 10 years is what you should at least opt for. The longer the repayment period, the thinner the EMIs to pay during the initial years. It is possible for students to pre-close their education loan by paying early but extending a repayment tenure is not that straightforward. 

Part pre-payment and pre-closure 

  • So after starting the loan payment or any time after taking the loan, you can pay back the principal amount and the incurred interest to the lender and close the loan which is called pre-closure of the loan.
  • Private banks and NBFCs have 6-month lock-in period, which means you will be able to pre-close your education loan only after 6 months of your first disbursement, whereas government banks do not have any such lock-in period. For pre-closure private lenders charge around 2k-4k irrespective of the loan amount. 
  • Now, what does part pre-payment mean, say you have a 40 lakhs loan and your monthly EMIs are around 50K, suddenly you get a job where you get a joining bonus of say 10K dollars which are roughly 7 lakhs rupees. So you can pay this 7 lakhs to the lender and reduce your principal amount and get your loan restructured, by doing so you can either close your education loan early by paying the monthly 50K EMIs or reduce the EMI amount say 40K, and close the loan in the provided repayment tenure. 

Methods of recovery 

Students have this false notion that if they miss their one EMI, then the bank will take away their pledged collateral security. But in reality, when you fail to repay an education loan, you get an ample amount of time and chances before33 actually the bank confiscates and auctions the collateral.

Soft recovery

  • In a soft recovery, after 90 days you and your co-applicant start receiving calls from the lender to make you aware of the issue, requesting you to start paying as early as possible and they also start issuing you a warning letter. 
  • So, in soft recovery, government banks don't call you or harass you as much as private banks and NBFCs do. Since private banks and NBFCs do not take collateral for a loan unlike government banks, they can get harsh in their rigorous follow-up.
  • If you start paying your EMIs during soft recovery follow-ups, your account will be removed from the NPA status by the lender. But if you still haven't started your payment, then lenders get into hard recovery.

Hard recovery

  • Ideally, lenders are supposed to immediately get into hard recovery after soft recovery follow-ups, which private banks and NBFCs get into real quick but government banks easily take 9-10 months before getting into hard recovery for student loan payback.
  • In the hard recovery phase, government banks send you a notice stating, that for the student loan payback your collateral will be sold off for the recovery if the remaining dues are not paid by a certain date.
  • If you do not respond to this hard recovery intimation as well, then the bank proceeds ahead and puts your collateral under an auction list.
  • After another 4-6 months, the collateral gets auctioned and the price is finalized. Bank will give you this last chance that you can still have your collateral back by paying off the finalized price, if you still couldn't, then your collateral will be auctioned and the bank will collect the money from the buyer, and after deducting the outstanding amount returns the extra amount to you. So a government bank gives you about 2 years before they actually take away your collateral.
  • When it comes to private banks and NBFCs, as mentioned they start their hard recovery right after 3 months of the soft recovery phase, and they can get really harsh on you during this phase as they send people to your home to ask for EMIs money and most of the time uses the blank cheque they had taken from you during your loan process.
  • Humiliates you and your co-applicant in front of your neighbor or your office colleagues. And if you have taken a loan from any foreign lenders, they go to another level by reporting it to your university or your employer abroad which could have very serious consequences.

You can refer to the 15th episode of the LoanFlix series in which our co-founder Damini Mahajan has mentioned the repercussions of delaying your abroad education loan payback. This is an informative web series on abroad education loans on YouTube. You can also watch the video if you're not into reading, below is the video

What to do during recovery

During this process of soft recovery and hard recovery, when you fail to repay an education loan, you should never try to run away from the lender but instead, talk to the lender and explain to them your reasons why you are not able to repay. They can always give you:

  • An additional 6-month to 1-year moratorium period
  • Reduce your interest rate
  • Or they can even give you an option of loan settlement which means you are not obliged to pay the entire amount but after negotiation pay off the portion of the amount and clear the loan. 

WeMakeScholars and Education Loan Repayment

WeMakeScholars is an initiative of the Government of India to help students navigate through the complexities of education loan applications, processing to repaying. We help thousands of students manage issues post-sanction — moratorium extensions and interest rate corrections. WeMakeScholars provides all services free of cost and our support isn’t limited to loan sanction; we help our students overcome repayment challenges. 

We've helped students in the past who have entrusted their education loan process with us. We are also constrained and can help only those who take their education loan through us, as we can talk to a lender on students’ behalf only if they've taken a loan through us otherwise we couldn't interfere. 

So do reach out to WeMakeScholars by requesting a callback for your education loan process.

FAQ

  1. What happens if I am unable to repay my education loan?
    It depends on how long you’ve defaulted. Delayed payments also hurt your credit score initially, though only by 2% in government banks, and often get you penalized as well. After 90 days of no payment, the loan is considered a Non-Performing Asset (NPA) and becomes difficult to borrow further. Soft recovery, including calls, and warning letters, is initiated by banks. If that does not work, hard recovery actions such as the auction of collateral (for government banks) or more aggressive recovery measures by private banks and NBFCs including visits and cheque usage, may be resorted to.

  2. Can I pre-close my education loan?
    Yes, you can close your education loan before you graduate. The ability to pre-close – repay the full loan before the end of the tenure – cuts down the interest costs. Pre-closure is not penalized by Government banks but private banks and NBFCs charge pre-closure fees in the range of ₹2,000 – ₹4,000 and have a lock-in period of six months. If you’re in a good financial situation, this option helps you complete the loan early without any penalty charge in government banks, but private banks charge higher charges and terms for pre-closure.

  3. How does missing an EMI payment affect my credit score?
    Failing to pay an EMI payment is going to have an instant effect on your credit score. Banks will report any delayed payments to credit bureaus and even a delay of up to 30 days does serious damage to your score. Further delay leads to more penalties – interest rates up to 2% in government banks, more in private banks and NBFCs. If you stop making payments on the loan after 90 days, the loan becomes a Non-Performing Asset (NPA) and you will experience a knock on your creditworthiness making it difficult to get future loans.

  4. What support does WeMakeScholars offer for loan repayment challenges?
    WeMakeScholars helps students with education loan repayment challenges and complex loan issues like moratorium extensions and interest rate corrections. We only support students who borrowed through the platform. Liaising between students and lenders, we help to resolve repayment difficulties. They are there helping students with the loan application process and with any post-sanction repayment problems they have.

  5. Can I extend the loan repayment tenure if I’m struggling with repayments?
    Depending on the lender’s policies, they will extend your loan repayment tenure. Typically they give you a repayment tenure of up to 10 years with some cases of 15 years. Now, you would be okay during payments and if there’s any hurdle to pay EMIs, that’s where this option can work to reduce the monthly EMI burden. But private banks and NBFCs may not provide the same flexibility and it’s not as easy to extend the tenure. The lender must be informed about your financial situation and the lender may propose a reduction of interest rates or an extension of the moratorium.