Education loans like any other loans need to be repaid regularly so as to avoid any negative impact on an individual's credit rating and also the financial charges that may be levied due to a default. However two things set education loans apart from other loans. The first is these loans are given at generally concessional terms and the aim is no deserving candidate should be denied an opportunity for higher education due to lack of funds. The second aspect is that most likely education loans are the first debt that an individual acquires so they lay the foundation of your credit history and your credit score. How the education loan impacts your credit score will depend on how you treat it.
As we said earlier these loans just like any other loan need to be repaid. Credit scores are created with the help of debt whether in the form of loans or credit card dues. Then these scores are used to assess your loan application when you apply for a loan. So it becomes like a chicken and egg thing and getting a loan for the first time could be a challenge. These educations loans which are often sanctioned based only on the basis of your admission documents and letter are a great way to start the credit trail as long as you pay them regularly.
Being a responsible borrower will ensure that by that you not only get a credit trail but also a good credit score which can come in handy after you finish your education. A good credit score not only could help you in getting a business loan if you want to start your business after finishing your education but it could also be a crucial factor in getting a job as a lot of employers in recent times include a credit check as part of the background check before hiring a candidate. Nobody wants to hire an irresponsible borrower who could prove to be a liability in the long run.
For this reason an education loan is a chance not only at creating a credit trail but it could also help you enhance credit score if you already have a credit rating. Repaying your EMIs on time without delays and default will ensure that your rating improves which makes it easier to access credit in future and as we said also impacts job prospects in current times.
As we said earlier, most banks are willing to offer education loans on concessional terms and these loans often have a moratorium period too. One is not expected to start repaying the loan immediately after course completion. This moratorium period varies from bank to bank and usually ranges between 6 months to one year. This means you have 6 to 12 months after course completion to start repaying your loans but there is no waiver on the interest in the meantime so it makes sense to start repaying as soon as one can.
Usually, banks wait for a certain period till you find a job before asking you to start repaying your loan. The period from the time of completion of the course till the time the banks start expecting repayment of the loan is known as moratorium or waiver period. As per CIBIL data the total outstanding education loans were to the tune of Rs. 63,800 by 31st March 2015 which is a huge number. It is important that the student do not wait for the right time or the right job to start repaying their loan or live in wishful world where they feel that default on education loan will have no impact on them. Since it is likely that an education loan is your first loan and your only loan for a considerable time period, default on it will impact your credit rating immensely. You may end up with a low CIBIL Score which may make it difficult for you to get any loans, a credit card or a even job. Also keep in mind that any default will impact the guarantor's credit rating too which most likely will be the borrower's parents or a guardian.
It makes sense to plan ahead at the time of taking a loan so that you are not burdened with more than what you can pay. Another important aspect is to not postpone the repayment, start as soon as you get a job. If you are unable to repay the entire EMI right away consider extending the loan tenure if possible but do not take the default route. Banks are willing to negotiated repayment terms with borrowers who might have genuine problems.