Why students should not default on education loans

Duly paying your education loan installments on time, each month, is the best thing that could be done to maintain a good CIBIL TransUnion Score, says Harshala Chandorkar of CIBIL.

Sachin Khare, a resident of Mumbai, recently saw an advertisement for a 3 BHK apartment in Mumbai’s upcoming suburb. The apartment was all Sachin had ever dreamt of -- plush locality, modern amenities and close to his place of work and most importantly fitting his budget. Sachin an MBA with honours from a reputed management school was a topper of his class and got a job at one of the leading technology company in Mumbai. Having started with humble beginnings from Satara in Maharashtra, a home in Mumbai was Sachin’s dream come true.

However, despite his salary and job credentials, to Sachin’s astonishment, his loan application got rejected on the basis his CIBIL Report and low CIBIL TransUnion Score. A distraught Sachin couldn’t fathom the reasons behind the rejection and at first thought it could be a mistake due to his name being a common one. On accessing his CIBIL TransUnion Score and report from CIBIL, Sachin realised that his score was low as he had not paid the EMIs on the education loan he had taken for completing his MBA course. It then dawned on him that in his effort to own his dream house and save money for it, he had completely neglected paying his education loan, thereby costing him the dream of owning a home in Mumbai.

Like any other loan, it is vital to know that an education loan is a credit facility provided to help one pursue his/her higher education. Like any other form of credit, education loans have to be repaid once one completes his/her course and gains employment. Also like any other loans and credit cards, defaults on education loans are also reported to the CIBIL and get reflected in the borrower’s CIBIL Report.

Repayment of an education loan generally starts within six months of the student taking up a job or one year after the course ends, whichever is prior. An education loan default occurs when the borrower fails to repay the education loan EMIs. Defaults on repayments of education loans will reflect in the borrower’s CIBIL Report and negatively impact his/her CIBIL TransUnion Score and hence like in the case of Sachin, if one defaults on an education loan, it could impact the chances of getting a loan for many more important milestones in the future like the dream home or the car he/she aspires.

Also in more developed economies, an individual’s CIBIL Report and CIBIL Transunion Score is a critical, reputational collateral and is used for multiple purposes by various institutions. Employers review it before recruiting a new employee; landlords require it before renting out an accommodation and of course telecom providers check an applicant’s credit history before assigning limits.

Duly paying your education loan installments on time, each month, is the best thing that could be done to maintain a good CIBIL TransUnion Score. Nevertheless, if you find it difficult to re-pay your education loans, consider an option of negotiation. Banks are open to negotiation. Request the banker to increase your loan repayment term and settle for a lower EMI. This may help reduce your loan burden significantly.

It is never too early to start thinking about your financial future. All these tips will pay off, and definitely help you avoid hurting your CIBIL TransUnion Score and CIBIL Report and thus safeguarding your dreams.

Illustration: Uttam Ghosh/Rediff.com

Harshala Chandorkar is Senior Vice President -- Consumer Services and Communications, CIBIL