Defaulting in loan repayment of any kind can severely affect your future borrowing capacity. And Education Loan is no exception. In fact, the government has not left the education loan outside the ambit of the NPA list. Banks and financial institutions are now keeping a strict vigil on education loan accounts, in order to ensure recovery of money.
Common Reasons For Defaulting In Education Loan Repayment
People default on education loan for varied reasons. A big gap between the increased fees of an institution and the salary offered by the companies during campus placement is one of the prominent reasons leading to delayed payment and defaulting for that matter. Dropping out of the educational institute or getting laid off could also result in a default.
Education loan allows tax deduction benefits u/s 80(E) of I-T Act, wherein interest on education loan paid during a financial year is allowed for tax deduction without any upper ceiling. Some people use their income to invest and earn a higher return whereas they only service the interest on the education loan to reap the tax benefit.
Here are the interest rate on offer by different banks:
|Interest Rate on Education Loan|
|Bank||<=Rs 7.5 Lakh||> Rs 7.5 Lakh|
|PNB||8.55%- 10.45%||8.45%- 11.05%|
|Note- Data taken from respective bank’s website as on 7th Aug 2018|
What Happens When You Default In Education Loan Repayment
The bank allows a moratorium period to start education loan repayment of about 6 months from getting a job or 1 year of completion of a course, whichever is earlier. Upon continuous EMI defaults, the bank may take serious action against the borrower. However, before taking harsh action, it may allow the borrower a chance to clear the outstanding balance.
What Steps Can You Take As A Borrower
Request Bank To Extend The Loan Tenure
If your salary is not sufficient to repay the loan, you may request the bank to extend the loan tenure to reduce the EMI burden. For example, if your education loan is extended over a period of five years, you can request the bank to extend the tenure to seven years or more, depending on the maximum period allowed by the concerned lender. It would significantly reduce the EMI burden and allow you to repay the loan without delay or default. It is important to note here that loan tenure extensions depend on the sole discretion of the bank and it may allow an extension on case by case basis.
Option To Repay The Outstanding Loan In Part Payment
In such scenarios where the outstanding amount is not huge, banks may allow the borrower to repay the remaining loan amount in parts. In case the outstanding loan amount is Rs 1 lakh, the bank may ask the borrower to deposit the amount in 4 parts, i.e. Rs 25,000 each in four months.
Impact Of Non-repayment of education loan
Upon non-repayment of education loan, the bank may share the report with the credit bureaus, resulting in lowering of Credit Score. A low credit score reduces your future capability to borrow money. Default in repayment of loan impacts the credit score of primary borrowers as well as the co-borrower of the loan.
If the borrower has pledged any collateral security (such as FD, LIC policy etc) against the loan, banks may seize them to recover the money.
Before applying for education loan, research thoroughly about the reputation of the college/institution in which you want admission. Always go for an established institute with a good placement record. A good placement would ensure good pay package, resulting in timely repayment of EMIs.
Education loan gives you the purchasing power to fulfil your aspirations for good education. However, like all other loans, you should always check your affordability factor and your backup plans before taking one.
The writer is CEO, BankBazaar.