Let’s imagine a scenario where you’ve taken an education loan for your higher education abroad. You’ve successfully completed your degree and you’re on the hunt for a job. Let’s say that you’ve secured a position in an organization with decent pay. What are you going to do with your salary? Now as an international student, you’re obviously going to have a number of expenses starting with paying off your education loan. In fact, repaying your student loan should be your priority because you do not want to face an education loan default. That would be the last thing that anyone would wish upon you. This article will help clear out all your queries regarding a student loan default along with tips on how to get out of such situations.
What Is An Education Loan Default?
To put it in simple words, an education loan default means you did not make your loan payments as outlined in your loan’s contract or a promissory note in other words. This means that you’re losing access to your credit. Defaulting on an education loan repayment can severely affect your future borrowing capacity.
Common Reasons Resulting In A Default
While signing your promissory note, there are several responsibilities of a student as a borrower that you will come across. If you are a student who has funded your higher education through an education loan, be warned. We’ve listed a few reasons why students face the issue of an education loan default for you so that you don’t fall prey to such practices.
- 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 the delayed payment.
- Dropping out of the educational institute or getting laid off could also result in a default.
- Inability to find a job after graduation results in a gap and, therefore, cannot make the payment on time.
- A turn of unexpected events as in the case of the pandemic
What Happens When You Default On Loan Repayment?
Everyone dreams of getting employed and starts earning right after college/university. However, as mentioned above, there are factors beyond control that could hinder this process. For instance, an uncertain job market, not finding the right job, failing to clear the course, leaves you in a situation without a salary to repay the EMI on time. In such scenarios, there is a high probability of an education loan default. Like all other loans, failing to repay your education loan EMIs on time, leads to several negative repercussions. Here’s what happens in case of a default.
- 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?
If you’re looking for a way out of a student loan default, here are few steps you can take:
Request The Bank To Extend
When facing the issue of an education loan default, one of the first measures you should take would be to request the bank to extend the loan tenure so that you can reduce your 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 help 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 a case by case basis.
Repay Through Part Payments
In scenarios where your outstanding loan isn’t a huge amount, banks may allow you to repay the pending loan amount in installments or parts. For instance, in case the outstanding loan amount is INR 1 lakh, the bank may ask the borrower to deposit the amount in 4 parts, i.e. INR 25,000 each in four months.
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Deferring The Payment
It is generally offered with all education loans, wherein you get to pause the outgo of your EMIs for a few months or years. Also known as the EMI holiday, if you are not offered this upfront, you can request your lenders to allow payment deferring. This could be opted for if you are currently facing an education loan default but you’re expecting a lump sum in the near future. You can also opt for this if you want to stabilize your financial conditions. However, make sure to check with your bank regarding the charges and penalties on student loan deferring options.
Step-Up Repayment Plan
Normally, while opting for an education loan, the repayment period starts with bigger EMIs which subsequently decrease over the repayment tenure. With the step-up repayment plan, you get to pay smaller EMIs in the initial phase, which increases over time. You should opt for this when you need some time to increase your cash flow. It is recommended that borrowers who have recently got a job or are in a financial crisis should opt for this. It is also opted by borrowers when they want to improve their credit scores and creditworthiness.
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