What Happens If I Default On Education Loan?

Lenders could be more sympathetic towards education loan defaulters, but legal action is always a possibility

In India, lakhs of students take education loans every year. Most preferred option is public sector banks, as these entities offer education loans at affordable interest rates. However, not every student may be able to repay their education loan. This presents the question, as to what happens when one defaults on their education loan. To know the answer, here are some important things to understand.

Willful vs. genuine default

Before taking any action, banks will first try to understand if the individual has willfully defaulted on the education loan or is facing a genuine problem. A willful defaulter is one who intentionally defaults on the education loan even when they may be having adequate money to repay the loan. If the bank identifies the individual as a willful defaulter, appropriate legal action can be taken after a specific timeframe.

In comparison, there could be cases where students may genuinely not be in a position to pay back their education loan. With education loans, students usually hope to complete their studies and get a job. But if they are unable to find a job and do not have any other financial backing, they may be unable to pay the education loan. In such cases, the lender can take a lenient view of the defaulter. The student may be granted more time to repay their loans without imposing any additional penalties.

What happens when you default on an education loan?

Bad credit score – Education loans are usually the first loans taken by an individual. And if there is a default, it will create a negative impact on the credit score and credit rating. When an individual defaults on their first loan itself, banks and financial institutions will treat such individuals as high risk. Such individuals may find it difficult to secure new loans or credit cards in the future. Challenges will be faced for all types of loans such as home loan, personal loan, car loan, etc.

Notice from the lender – When you default on your education loan, the lender will start sending you notices to pay your loan EMIs. These are usually gentle reminders, asking you to repay your loan. You will start receiving such notices after your first EMI default. The lender can also impose penalties, which would get added to the EMI amount.

Legal action – If you have not paid any EMI on your education loan for more than 180 days, the bank can initiate legal action under the Negotiable Instruments Act of 1881. It is likely that action will be taken as per the provisions of Section 138 of the Act. Under this section, the individual could face fine or imprisonment or both. Imprisonment can be for a term of up to 2 years.

If you are unable to pay your education loan, it is important to communicate your difficulties to the lender. You can request an extension of the EMI payment period. Depending on your situation, banks can also offer you easier options for loan restructuring. By keeping communication channels open with the lender, you can avoid legal troubles associated with your education loan default.