Defaulting in repayment of an education loan affects the child’s credit score and has an impact on the credit scores of the co-applicant. Applying for an education loan is a way to get into the credit system; when an individual submits a loan application, the financial institution checks the CIBIL score with the bureau, effectively entering the credit system.
Ankit Mehra, founder and chief executive, GyanDhan, an edu fintech company, said, “Defaulting on an education loan has serious repercussions for the borrower and the co-borrower, though it may depend on the loan amount that was borrowed. The loan is labelled a non-performing asset (NPA) if the equated monthly instalment (EMI) is overdue for 90 days. If the loan amount borrowed was only up to ₹4 lakh, then the borrower and the guarantor typically first receive warning letters and notices. If they don’t pay heed, the borrower is declared a defaulter. In such a case, the lender takes legal action against the borrower. Similarly, for education loan amounts up to ₹7.5 lakh, collection agencies hound the borrower and the co-borrower for repayment. If the borrower had pledged collateral, it would be seized and auctioned to settle the debt.”
The impact of default is not limited to just warning letters and notices. The borrower may not get any further credit, including credit cards and personal loans.
Mehra said, “If the borrower stops responding to warnings and notices, the bank shifts its focus on the co-applicant and the guarantor, who are often the parents of the borrowers. The bank may cut its losses by settling the loan for a value less than the loan amount as a last resort. As a result, there will be a negative impact on the CIBIL score, and the credit report will mention the settlement, but the consequences are worse in case of a default.”
What you should do
Adhil Shetty, CEO, BankBazaar.com, said that high-value education loans are often backed by collateral that the bank will liquidate to recover its dues. “The damage to credit health can be long-term. Therefore, the best way out for the student is to find ways to repay the loan. In case of difficulties with the payment such as lack of employment, the borrower must keep engaging with the bank to determine ways to make the payments more manageable,” he said.
Sometimes, students are unsure of their financial capabilities, future income. In that case, the student should opt for a longer loan tenure, adequately lowering the EMI amount. Though it makes the repayment period long, it will be easier for the borrower to manage. Mehra said, “Students should also create an emergency fund with the purpose of timely repayments, even when income is irregular. If the student is on the verge of default, they should get the loan restructured.”
