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 for 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 couldn't pay back their abroad education loan altogether.
The answer to what happens when you fail to repay an education loan is already given by our co-founder Ms. Damini Mahajan on our YouTube channel. You can refer to the 15th episode of the LoanFlix series where she has mentioned about 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 is education loan repayment?
Education loan repayment is an integral part of the education loan process. Repayment is basically the action of paying back a loan borrowed from a lender. The education loan repayment policies in India vary from lender to lender.
Education loan repayment policies
Pertaining to student loan payback, the most important thing you need to understand is the moratorium period given by the lender to students. It consists of a student's course duration plus 6 to 12 months during which students are given the liberty of not having to pay any incurred interest to the lender. But there are lenders who ask students to pay either full or partial interest during their 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.
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 months 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 means, 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 around 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.
Repercussions of delay in abroad education loan payback
So when you take a study loan for abroad education, after the commencement of your repayment period you are required to pay EMIs by a certain due date. If you miss your EMI by anywhere between 1 day to 30 days, then the lender reports it to the credit bureau and it reflects as DPD (Days Past Due) on your credit report which further reduces your CIBIL score as well as the chances of getting any future loan.
Now, what happens if your EMI due date crosses 30 days? In such cases, the lender along with reporting it to the credit bureau starts charging penal interest which is extra penalty interest on top of the regular one. So in the case of a public bank, this penal interest is about 2% per annum and the same is around 3% to 4% per annum in the case of private banks and NBFCs.
But if this continues up to 90 days and you still haven't paid your EMIs then the lender can declare your account as NPA (Non-Performing Asset ) which means the lender classifies you as a defaulter and it reflects on your credit report and reduces your credit score drastically.
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.
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.
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.
What to do during recovery
During all 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 pays off the portion of the amount and clear the loan.
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. It's better to have a lifejacket on than to be sorry in the middle of a river.