The thought of "what would happen if, for some reason, you couldn't pay back your education loan during the repayment tenure to the lender" must have crossed your mind once. No student would want to find themselves in such a situation, as the intention behind taking a study loan abroad is always to repay the full amount along with the interest.

However, the questions of ‘what happens if someone delays their EMIs by 1 to 3 months or fails to pay during the education loan repayment’ and ‘what is meant by default on education loans?’ often arise. This article aims to provide a clear understanding of the consequences of not being able to repay your education loan. Keep reading to learn all about the potential outcomes. 

What is Education Loan Repayment? 

Before knowing about the education loan default, let’s understand what education loan repayment is. Education loan repayment is the method of paying back the loan borrowed from a bank or loan institution to finance higher education costs.

Education loans typically offer a moratorium period of 6 to 12 months. During this period, students don’t have to repay the loan, giving them a grace period to find a job or get their finances in order. 

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.

What is the Default on Education Loans?

A default on an education loan occurs when the student fails to make payments to their loan according to the loan agreement. When the students miss the payments on their education loans for over a certain period, generally 90 days, they will be considered defaulters. Defaulting on an education loan can have severe consequences for the student and their family.

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.

Lenders can Take Legal Action:

There are several legal consequences of defaulting on education loans. If the payments on education have not been happening for more than 180 days, the bank can take legal action against the borrowers to recover the loan amount.

International Lenders and Reputation Consequences:

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

Recovery Measures:

  • The bank 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 collateral-based loans, government banks are generally more lenient. However, the risk of unsecured loans makes private banks and NBFCs more assertive. 
  • 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.

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.

How to Avoid Default on Education Loans

Selecting an Optimal 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 your finances.

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. However, private banks and NBFCs usually have a 6-month lock-in period and can impose pre-closure charges for closing the loan within this period.

WeMakeScholars and Education Loan Repayment

WeMakeScholars is an organization funded and supported by the Ministry of IT, Government of India, to help students navigate through the complexities of education loans from the application, processing, to the repayment. We have helped thousands of students solve post-sanction issues like moratorium extensions and interest rate corrections. WeMakeScholars provides all of its services free of cost to students, and our support isn’t limited to loan sanction; we help our students overcome repayment challenges even after the loan is sanctioned.

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. 

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