Many students opt for education loan settlements due to unforeseen financial conditions. A student loan debt settlement can reduce the financial burden on these students and their families. However, many students don’t know that a one-time settlement on education loans can significantly impact their credit score.

In this article, we will learn about student loan one-time settlements and their impact on the CIBIL score. We have also included a few tips on how to improve the CIBIL score after an education loan settlement.

What is an Education Loan Settlement?

An education loan settlement, or a student loan debt settlement, refers to when borrowers pay a reduced amount instead of the full outstanding loan amount and settle the student loan. Banks provide an option for students unable to meet repayments due to a financial crisis to repay a discounted student loan debt in one final payment. 

A student loan one-time settlement is offered to defaulters who are unable to repay the loan due to unforeseen circumstances, such as sudden unemployment, disability, or loss of life. The one-time settlement option on student loans reduces the financial burden of students and their families. 

Who can opt for Student Loan One-Time Settlements?

Students who are unable to repay their education loans due to genuine financial difficulties can opt for a one-time settlement on their loans. The student loan one-time settlement option is often provided to students whose education loans have been converted to Non-Performing Assets (NPAs).

A student loan is converted into an NPA when the student fails to make repayments to their loan for more than a certain period. Students should know that they can convert an NPA education loan back to normal before opting for an education loan settlement.

Difference between Student Loan Debt Settlement and Closure

Student Loan Debt Settlement:

  • Student loan debt settlement refers to when students pay a reduced outstanding loan amount to settle their education loans. 
  • Banks make an agreement to reduce the outstanding loan amount for the students to make a final payment on the loan to settle it.
  • Making a one-time settlement on an education loan can significantly impact the CIBIL score.

Student Loan Closure:

  • Student closure, on the other hand, happens when the students pay off their student loan debt according to the loan agreement and close the loan.
  • A student loan closure can have a positive effect on the credit report.

Process of Student Loan One-Time Settlements

Banks often provide the one-time settlement option to students whose education loans have been converted to NPAs. Lenders do not want NPAs as they don’t generate any income. Hence, lenders provide a one-time settlement option on education loans. The following is the step-by-step process of how education loan settlement works:

  1. Contact the Lender

    The first thing that students who are unable to repay their outstanding education loan due to a financial crisis should do is contact their lender. Students should inform their lender about their financial condition. And submit an education loan settlement letter to request a one-time settlement on their student loan. 

  2. Document Submission and Verification

    Subsequently, they should submit the documents proving their financial condition, such as income proofs, previous payment records, or medical statements. After the submission of the documents, the bank will start verifying their request. They will evaluate the repayment history and financial condition of the applicant.

  3. Education Loan Settlement Negotiation Process

    After the evaluation, the lender and the student start negotiating the loan amount for the education loan settlement. Students can seek a legal and financial consultant to help them with the negotiation process.

  4. Student Loan Debt Settlement Agreement

    Once the bank and the student agree upon the final settlement amount, both parties sign the student loan debt agreement. It is a legal contract between the student and the bank that outlines the updated loan terms.

  5. Final Payment

    The final step in the education loan settlement process involves the student or their family making one final payment to settle the student loan.

Impact of Education Loan Settlement on CIBIL Score

Although an education loan settlement initially reduces the financial burden of the students, it can significantly impact their CIBIL score. The future loan eligibility of the students will be affected due to the ‘settlement’ default in the credit history. Here’s how an education loan settlement impacts the CIBIL score:

Reduces the CIBIL Score

An education loan settlement negatively affects the credit score. After a student settles their education loan with a one-time settlement, their CIBIL score significantly drops. This negative impact on the credit can last for several years. This makes it hard for students to improve their credit score back to normal.

WeMakeScholars can make your dream of studying abroad come true by providing you with the best education loan support. We have a dedicated team to help you resolve any CIBIL score issues in education loans. We are here to help! Simply request a Callback on our website, and one of our experienced financial officers will get in touch with you. Since WeMakeScholars is funded and supported by the Ministry of IT, we offer our services completely free of cost to students. 

Affects Future Borrowing

This reduced credit score due to the loan settlement affects the loan eligibility of the student for other loans. When a student opts for an education loan settlement, it reflects as a ‘settlement’ default on their credit report. This ‘settled’ status in the credit history indicates a negative repayment history of the student. This makes lenders hesitant to offer any other loans to the student, ultimately affecting their future borrowings.

Not having the right student loan guidance is one of the major reasons why many students are unable to repay their education loans. WeMakeScholars can help you avoid such situations. WeMakeScholars is an organization dedicated to providing the best education loan guidance and support to students. Request a Callback from us today, so that we can help you get the best education loan with friendly repayment terms. 

Tips to Improve the CIBIL Score After an Education Loan Settlement

Although a student loan one-time settlement has a negative effect on the CIBIL score, it can be improved using the following tips:

Obtain a No Objection Certificate (NOC)

The first thing you should do after an education loan settlement is obtain a No Objection Certificate (NOC) from the lender. An NOC indicates that you have repaid your loan and have no pending payments. Obtaining an NOC after an education loan settlement can help you improve your CIBIL score.

Make Timely Payments

Your repayment pattern significantly affects your credit score. Making timely payments on their credit services, such as a credit card, can quickly improve your credit score. It is one of the most effective ways to improve the CIBIL score. Make sure to clear all your dues on time to boost your credit score.

Monitor Your Credit Report 

Monitoring your credit report can help you understand any changes or improvements to your credit score. Hence, it is important to track your credit history to identify and resolve any issues in the credit report, which ultimately helps to improve your credit score.

Apply for Secured Loans

Getting an unsecured education loan after the education loan settlement is highly unlikely. However, you can apply for a secured loan if the default amount is less than ₹50,000. Applying for a secured loan and making timely repayments on it can significantly improve the credit score.

Banks can refuse to give you a loan because of a low credit score. However, when you apply via WeMakeScholars, we have a dedicated team to help you resolve your CIBIL issues and improve your credit score. With our experience and knowledge, we can maximize a student’s chance of securing funds even with a low CIBIL score. Do reach out to us by requesting a callback.

Conclusion

Students need to understand the effects of education loan settlements on their CIBIL scores. Opting for a one-time settlement on your student loan can significantly impact your credit score and affect your future borrowings.

This article covers the impact of education loan settlements on the CIBIL score, along with the process of student loan debt settlements. We have also included several tips on how to improve the CIBIL score after an education loan settlement.