Overseas education is not cheap and after taking such a huge debt, you must have thought at least once that what would happen if you were unable to repay your education loan?
A student would never want to be in such a position themselves since they always want to complete their course, secure a job and repay their study loan in full, plus interest when they take out a loan for study abroad.
However, this question arises every now and then, and this article will provide you with a clear understanding of what really happens when someone fails to pay back their education loans abroad or misses installments due to any reason.
It is important to understand the moratorium period or grace period that lenders give students regarding student loan repayment. During this period, students are allowed to pay no interest to the lender during the course duration plus up to twelve months. Some lenders, however, require students to pay either full or partial interest during the moratorium period.
Public banks provide a no-payment grace period since they offer a loan on collateral, which reduces their risk compared to private banks and non-bank financial institutions, which generally offer no-collateral loans, hence they require payments of full or partial interest during this period.
As a result, during a moratorium period, you may be required to pay partial interest, full interest, or no interest at all. As soon as this period ends, your lender will calculate your EMIs and loan amortization schedule based on how much you have disbursed from the sanctioned loan amount. Now that will stress you a bit but hold on, we have some good news coming 🙂
The best way to mitigate the risk of default of Study Abroad Loan
Choosing the right lender for your education loan is as important as planning how you will repay the loan amount. Here comes EduCred in the picture. In addition to helping you obtain a study loan overseas, EduCred can assist you if you run into any problems in the future.
Selecting study abroad loan’s repayment tenures
When students opt for an education loan, they are confident that they will craft their career, secure a good job and be able to repay it in no time, but the picture reveals later on when they begin paying back the loan.
While living with their parent and planning for a Master’s Degree in the US, Canada, New Zealand and Australia, assuming that students will receive a pay package of INR 60 lakhs to 1 Cr after completing their degree, paying off an education loan of 40-50 lakhs looks like a cakewalk.
However, students should never ignore the worst-case scenarios, such as recession, layoff from their Job, pay cut, the job search taking longer than expected, or it was less successful than expected.
Therefore, we at EduCred advise our students to always choose an Overseas Education Loan repayment period of at least 10 to 15 years when taking out a student loan.
The government gives students 10 years of repayment tenure, which can also be extended to 15 years, but 10 years is the minimum we recommend you to go for. In case everything goes as per your plans, which we wish to happen, Student loans can be paid off early.
Prepayment and preclosing in part
You can pay off early which is the best option and only the interest for the borrowed period will be charged.
Government banks do not have a lock-in period, so you will be able to pre-close your education loan only after 6 months of receiving your first disbursement from a private bank or NBFC. No matter how much the loan is, private lenders charge approximately 2k-4k for pre-closure of the Loan.
In simple language, the earlier you pay, the less interest you will be paying.
The consequences of delaying the repayment of an education loan abroad
Getting to the crux of the question, The EMIs are payable by a certain due date after you take out a study loan for overseas education. If you default on your EMI by one day to thirty days, it will appear on your credit report as Default, which will further not only reduce your CIBIL score in India but also will affect your country of residence Credit Score like Equifax and your chances of getting a loan in the future will be deemed.
Along with this, the lender will report it to a credit bureau and will charge a penalty. This is extra interest on top of the regular interest. The penal interest rates for public banks are approximately 2% per year, and those for private banks and non-bank financial companies are between 3% and 4% per year.
However, if you continue to fail to pay your EMIs after 90 days, the lender may declare your account as a non-performing asset (NPA) which will affect your credit report and lower your credit score significantly.
What will happen to collateral security if I am not able to pay my study abroad loan
A common misconception among students is that the bank will take their pledged collateral if they miss their one EMI. In reality, however, if you fail to repay an education loan, you are given ample time and chances before the bank takes possession of the collateral and auctions it.
After 90 days in a soft recovery, you and your co-applicant will begin to receive calls from the lender informing you of the issue and requesting that you begin paying as early as possible. The lender will also send you a warning letter.
So, during soft loan recovery, we have observed that government banks are way more polite than private banks or NBFCs. As private banks and NBFCs generally do not require collateral for loans, their follow-up can be more rigorous.
In the event that you begin paying your EMIs during the soft recovery follow-ups, your account will be removed from the NPA status by the lender. However, if you have not yet begun making payments, lenders will begin a hard collection effort.
A hard recovery type
Private banks and NBFCs have the advantage of quickly getting into hard recovery after soft recovery follow-ups, while government banks can easily take up to a year before they enter hard recovery for student loans.
If the remaining student loan dues are not paid by a specified date in the hard recovery phase, your collateral will be sold off for the recovery.
If you do not respond to this hard recovery intimation, the bank proceeds ahead and puts your collateral under a Listing of auctions. Approximately 4-6 months later, the collateral will be auctioned and the price will be determined. The bank will give you this last chance to return your collateral if you pay off the finalized price. If you cannot do so, your collateral will be auctioned and the bank will collect the money from the buyer, then return the remaining amount to you. Government banks usually allow you to keep your collateral for about two years before they take it away.
In the case of private banks and NBFCs, a hard recovery phase begins after three months of soft recovery and they can be quite harsh on you in this phase, sending people to your home to ask for EMI payments, and in most cases using the blank check they had taken from you during the loan application process.
It humiliates you and your co-applicant in front of your neighbor or your colleagues at work. They go to another level by reporting your loan to your university or your employer abroad, which may result in very serious consequences if you have taken out a loan from a foreign lender.
During the recovery of overseas education loans, what should be done?
A question might have crossed your mind too, Can you go to jail over student loans? One word answer to this is “NO”. The student loan is considered a “Civil” debt, the same as that of Credit Cards or any unsecured personal loans. In this process of soft recovery and hard recovery, if you are unable to repay an education loan, you should not run away from the lender, but rather explain to them why you are not able to do so.
As an alternative, they may grant you an additional 6-month to 1-year grace period, reduce your interest rate, or offer you the option of the loan settlement, in which case you are not obligated to pay off the entire amount, but must pay off the portion of the amount after negotiating.
It has been our privilege to assist students who entrusted their education loans to us in the past. The only students we can assist are those who have taken out a loan through us, as we may be able to speak with the lender on their behalf only if they have taken out a loan through us, otherwise, we cannot assist them. We encourage you to contact EduCred by requesting a callback regarding your education loan process. When you’re in the middle of a river, it’s better to have a life jacket on than to be sorry later.
EduCred is your partner that provides financing for international education. There are over 15 public and private banks and NBFCs in India that we are associated with, and we can help you obtain the best abroad education loan based on your profile. In accordance with the Digital India campaign, this initiative is free of charge.
We have vast experience dealing with students going abroad to study abroad in countries such as the United States, Canada, the United Kingdom, Australia, Germany, Sweden, Italy, China, and France, among other European countries.