It was a Sunday evening and I was taking note of the outstanding dues on my credit cards. It was time to pay for all those shopping binges and eat-outs of last month! But never mind – at least my debt burden had reduced, and that's a great reason to feel good! And just as I was figuring out the sum left on hand for managing the operating expenses of the coming month - after accounting for that pesky minimum balance in the bank account - the doorbell rang. It was my neighbour Nikhil, who had moved into the apartment next to mine six months ago, soon after he finished his master's degree in administration from a city college.

He asked if I could answer a few questions he had. As I smilingly gestured for him to come in, he asked, “Should I necessarily repay my education loan?” Shocked by such a question, I replied, “ It is a loan and you are expected to repay it!”. His response was an even more stupefying, “My seniors in college said banks generally write it off and I need not bother...”

Now that was a serious misconception. Defaulting on your education loan has multiple repercussions. To start with, it impacts your credibility and closes your options of getting a loan from a credit institution in the future. Wondering how your then banker will know that you had defaulted on an education loan? Read on!

CREDIT HISORY

Bankers and other lending institutions across the country report credit information of their customers (borrowers) to the Credit Information Bureau (India) or CIBIL for short. CIBIL was established by the Government of India and Reserve Bank of India to help banks develop a repository of information to know the credit history of a borrower and take an objective decision of lending to them.

Of late, every banker verifies CIBIL's credit report before clearing a loan application. This credit report is nothing but your credit history - the loans you have taken, the outstanding loan amount on a particular date, the EMIs you've paid on time as well as the EMIs you missed out on. Other details which are compiled in the credit report are the number of enquiries you made with different bankers and credit card companies for loans. Defaults on all types of loan payments - including education loans - reflect in your Credit Information Report says Ms. Harshala Chandorkar, Vice President, Consumer Relations, CIBIL.

If you thought you had only to worry about banks getting hold of your credit histories, there's more. Of late, employers too have been asking prospective candidates to submit their Credit Information Report from CIBIL. Your employability could be affected by the report, as it happened with an acquaintance of mine, who was refused employment in a bank because of his poor credit history. Would you rather pay for your mistakes at a later stage in life or plan for those loan EMIs and pay them on time?

banker's course of action

Repayment on an education loan starts within six months of your taking up a job or one year after the course completes, whichever is earlier. The loan term may extend between five to seven years. When a borrower skips his EMI, Mr Adhil Shetty, CEO, BankBazaar.com, says, “The banks might wait for one to two months. If repayment, along with late payment fee, is not made even then, the bank is likely to issue a notice. Post this, the loan guarantor will be contacted and the collateral pledged could be taken into the bank's possession”. Of course, collateral is taken only on loans over Rs 7.5 lakh; in other cases, the banker stands to lose on a customer default. But don't let that fool you into believing that you have nothing to lose on education loan default. As a borrower, your credibility is severely damaged and it becomes a negative mark in your credit history.

Negotiating with Banks

Banks are ready for negotiation. So if you find yourself unable to meet loan payments, consider a few options before blissfully ignoring EMIs. For one, banks are open to negotiation says Mr Adhil Shetty. “Bankers evaluate merits of the case, the credit profile of the borrower and so on, and negotiate for mutual benefits.” For instance, you may request the banker to increase your loan repayment term and settle for a lower EMI. This may help reduce your burden significantly. If you have good negotiation skills the banker may also agree to extend the moratorium period on the loan for a little while more. So, talk it out with your banker.

Two, you may service interest during the study period. With every semester, as the banker disburses the loan instalment, the principal lent as well as the interest on the principal accumulates. The total outstanding amount at the end of the moratorium period could then become an astronomical sum. A solution to this problem is to service simple interest on the loan in the study period itself if possible. If you could, say, take up a part-time job during the course period, and start paying simple interest on the principal, the EMI amount will reduce substantially when it starts after the moratorium period. Here's an incentive - some banks give an interest subsidy of 1 per cent if the individual services interest during the repayment holiday.

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