Education loans have helped millions of students in India achieve their academic dreams. However, if you fail to repay the loan after completing your studies, it can lead to serious financial consequences. In this blog, we’ll explain what will happen if an education loan is not paid, using real examples, simple language, and easy calculations to help you understand clearly.
What Is an Education Loan?
An education loan is money borrowed from a bank or financial institution to cover the cost of higher education. It usually includes tuition fees, hostel charges, books, travel expenses, etc.
Example:
Ravi takes an education loan of ₹10,00,000 to study engineering. The interest rate is 10% per annum. After a moratorium period (study years + 6 months grace), he must start repaying.
What Is the Repayment Period?
Generally, repayment starts after the moratorium period ends. It can go up to 15 years depending on the lender and amount borrowed.
Example Calculation (Simple Interest):
Loan amount = ₹10,00,000
Interest rate = 10% p.a.
Course duration = 4 years
Moratorium = 4 years (study) + 6 months (grace)
Total interest accrued during 4.5 years =
₹10,00,000 x 10% x 4.5 = ₹4,50,000
Total repayment = ₹10,00,000 (principal) + ₹4,50,000 (interest) = ₹14,50,000
What Will Happen If an Education Loan is Not Paid?
If you fail to repay, here’s what will happen step-by-step:
a) You Miss an EMI (Equated Monthly Installment)
- The first consequence is a reminder or warning from the bank.
- A small penalty may be added for late payment.
- It affects your credit score slightly.
b) You Miss EMIs for 3 Consecutive Months
- The bank may classify your loan as NPA (Non-Performing Asset).
- Your CIBIL score (or credit score) drops significantly.
- Future loan approvals (like home, personal, or car loans) will become difficult.
Example:
If your score was 750, it may fall to 600 or even below after defaulting.
c) Bank Recovery Actions Start
After a loan becomes an NPA:
- The bank sends recovery agents to remind or collect money.
- You may get legal notices.
- If the loan is secured with collateral (like property or FD), the bank can seize and sell the asset.
d) Legal Case or Civil Suit
If the loan is unpaid for a long time:
- The bank may file a case in court.
- Under the SARFAESI Act (for secured loans), banks can recover money by auctioning assets without court intervention.
- You may be blacklisted by financial institutions.
e) Co-applicant or Guarantor Also Affected
Most education loans in India require a co-applicant (usually a parent).
- If you default, their credit score and financial record will also be damaged.
- They may be contacted for loan repayment.
How Long Before Your Loan Is Considered NPA?
Most banks follow a standard guideline:
- If EMIs are not paid for 90 days, the loan is marked as NPA.
Can You Go to Jail for Not Paying an Education Loan?
No, education loan default is a civil issue, not a criminal offense. You can’t be jailed, but legal action like court notices and asset seizure can happen.
What Are Your Options if You Can’t Pay?
If you are genuinely struggling, take the following steps:
a) Contact the Bank Immediately
Inform them about your financial situation. Banks often offer:
- Restructuring of loan
- EMI holidays
- Reduced interest temporarily
b) Ask for Loan Rescheduling
The loan tenure may be extended to reduce EMI.
Example:
Original EMI = ₹15,000 for 10 years
Extended tenure to 15 years = EMI drops to ₹11,000 approx.
c) Use Government Support or Subsidies
Government schemes like Central Sector Interest Subsidy (CSIS) help students from economically weaker sections by paying interest during the moratorium.
d) Part-Time Work or Freelancing
Students or fresh graduates can start working part-time or freelancing to manage small EMIs.
e) Balance Transfer to Another Bank
You may shift your loan to another bank with lower interest rates or better repayment terms.
What If You Have Moved Abroad?
Even if you’ve moved abroad:
- You are still legally responsible to repay the loan.
- Banks can track your international financial activity through consulates or credit bureaus.
- It can affect your visa renewals and future immigration plans if you default.
Credit Score Impact: How Serious Is It?
Your CIBIL score is crucial for any future financial activity.
- A score below 650 is considered risky by lenders.
- Defaulting on your education loan can make you ineligible for:
- Credit cards
- Home loans
- Personal loans
- Business loans
What Is the Best Solution?
- Always communicate with your bank.
- Don’t wait for default; ask for help early.
- Avoid ignoring calls or letters.
Conclusion
Education loans are meant to support your career dreams. But ignoring them after completing your education can severely impact your financial future. From credit score damage to legal notices and losing your assets, the consequences are real. The good news is — banks are willing to help if you act early and responsibly.
Remember: Repayment is not just about the bank — it’s about your future.