What Legal Action Is Taken Against Education Loan Defaulters?

Just like any other loan, defaulting on Education Loan repayments can attract serious legal consequences and bear an immediate impact on your credit score. While a slight delay of one or two EMI repayments may not always have immediate repercussions, lenders can rightfully take legal action against Education Loan defaulters if you fail to make a payment for more than 180 days.

An Education Loan is often a crucial financial aid for many aiming to fund their higher education dreams. However, making timely loan repayments is still imperative to avoid legal consequences. In this blog, we explore what happens when you’re an Education Loan defaulter and how you can avoid legal action by lenders. Read on to know more!

What Counts as a Default on an Education Loan?

When you avail of an Education Loan, the repayments generally start after a pre-determined moratorium period. For most lenders, repayments usually start one year after completion of your academic course or six months from the date of placement, whichever is earlier. You repay in EMIs (Equated Monthly Installments) from then on.

Most banks and NBFCs will not immediately resort to legal action if you delay or miss repayments for up to 90 days. A delay of more than 90 days classifies your Education Loan account as an NPA (Non-Performing Asset) and leads to intensified recovery efforts by the lender.

However, if your repayments are delayed by more than 180 days, lenders can rightfully pursue legal action against Education Loan defaulters under provisions of Section 138 of the Negotiable Instruments Act of 1881.

Legal Action Against Education Loan Defaulters

As stated before, lenders may not readily resort to legal action when you are an Education Loan defaulter for less than 90 days.

The process usually follows a series of gentle reminders to intense recovery attempts before lenders resort to legal action.

Here is what usually happens when you default on an Education Loan in India:

1. Gentle Reminder and Negotiation

Lenders seldom directly proceed to pursue legal action against Education Loan defaulters during the initial stage. Here is how lenders establish a formal communication for payment reminder and recovery:

• Phone calls and e-mails for pending payments
• Formal reminder letters with the amount due, interest, and charges
• Reconstruction proposals to facilitate repayment, like extending tenure or reducing EMI temporarily.

If you answer and agree on a repayment plan, you can temporarily resolve the issue. However, ignoring the reminders can cause the lender to initiate legal action against Education Loan defaulters.

2. Impact on Your Credit Score

One of the earliest non-legal penalties is a decline in your credit score as soon as you miss or delay an EMI payment. Just like any other loans, Education Loan repayments are also reported to credit bureaus by all financial institutions as per general norms. When you don't make payments:

• Your credit score takes a big hit
• Future loan approvals, like a car, home, or Personal Loan, become much more difficult.
• Even when you are approved later, you might have to pay a higher interest rate because of your poor credit history.

While this may not qualify as legal action, it's an important consequence that can have a long-term impact on your creditworthiness.

3. The Legal Recovery Process

When you don't make payments even after constant reminders, lenders initiate formal legal recovery processes. These are usually in line with the terms of the loan agreement you signed and banking and debt recovery legislation. Here's what can happen:

Issuance of a Legal Notice

The lender serves you with a notice for payment within a period (say 30 days). The notice will inform you about:

• Principal amount falling due.
• Accrued interest and payment charge falling due.
• Warnings that further court action would be initiated if you fail to make the payment.

Filing a Case in the Debt Recovery Tribunal (DRT)

Banks and lenders now transfer the issue to the Debt Recovery Tribunal. The DRT is a special court tribunal that hears recovery of loan cases.

• The lender applies for recovery.
• You will be served a summons to go to the tribunal court.

If the tribunal rules in favor of the lender, they can recover the dues legally by seizing your assets or salary.

Action Under the SARFAESI Act

In some instances, lenders can pursue recovery under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. With this, they can:

• Take possession of assets that are secured (like collateralised property).
• Sell them to recover the loan amount.

In the case of an Education Loan, SARFAESI can be used primarily if there is collateral, such as if your parents provided property as collateral.

Action Against Co-Borrowers and Guarantors

Most student loans demand a guarantor or co-borrower, which can include your parents or very close family members including siblings and in-laws. In case you default:

• The lender can directly ask for payment from your co-borrower.
• Legal proceedings can be initiated against them, too.
• Their credit score can be damaged because of your default.

In general, defaulting not only affects you, but it can also financially and legally harm your relatives as well.

Attachment of Salary or Bank Accounts

If you're employed but not paying your EMIs, then lenders can seek a court order to attach a portion of your salary until the loan is repaid. Additionally:

• Your bank accounts may be frozen.
• Funds from your account can be seized to cover loan dues.

This is typically done after getting a recovery certificate from the tribunal or court.

Criminal Proceedings in Case of Fraud

Defaulting on an Education Loan is generally dealt with as a civil case. But it is converted into a criminal case in the case of suspected fraud, for example:

• Issuing fake educational certificates.
• Submission of false proof of income.
• Sale of pledged securities without the bank's approval.

Here, criminal proceedings under applicable sections of the criminal law can be initiated, which can involve penalties or even imprisonment.

Settlement and Single-Time Payment Facility

If you cannot pay the whole amount, lenders can also offer you the option to settle the loan account. This is a one-time lump sum payment arrangement where:

• You repay an amount less than the balance due.
• The lender agrees to write off the balance remaining.

Although this will settle the legal case, it will massively damage your credit record, and you'll not be approved for any future loans.

How to Avoid the Legal Consequences Against Education Loan Defaulters

Legal action for defaulting on an Education Loan can bring long-term financial harm and emotional stress. You can prevent it if you act in time and keep your lender informed by following these tips:

Communicate Early

If you anticipate missing an EMI due to a lack of funds, reach out to your lender beforehand. Banks and financial institutions would rather resolve the issue by themselves than go through the trouble and expenses of litigation.

Opt for Loan Restructuring

Request restructuring possibilities to facilitate repayment. These may involve:

• Extending the repayment period to reduce monthly EMI instalments.
• Switching to a step-up payment plan, under which the EMI is initiated at a lower level and increases as your income increases.

Request Moratorium Extension

Many times, if fail to establish a stable source of income even after the completion of the moratorium, lenders may consider you for a moratorium extension depending on internal policies. Lenders can extend the time before repayment starts if you have strong reasons and sufficient supporting documents.

Pay Part Payments

Although you might not be in a position to pay the entire EMI amount, pay small, regular payments. It indicates your commitment to repay, restricts the accumulated interest and penalty, and preserves your lender's goodwill.

Look into Loan Consolidation

If you owe more than one loan, merging them into a single payment schedule can make your finances easier and your total interest rate lower.

To Conclude

Education Loan defaulters in India can face serious legal action if payments are delayed by more than 180 days. However, lenders usually don’t resort to intense recovery actions until you’ve defaulted repayment for more than 90 days.

While financial distress is often uncontrolled, establishing early communication with your lender and discussing options like loan restructuring and extension of moratorium are some ways to avoid legal action for Education Loan default.

Frequently Asked Questions

Can a lender sue my parents if I am an Education Loan defaulter?
Yes, lenders can file a legal complaint against your parents if they are designated co-borrowers or guarantors.

Will defaulting on an Education Loan impact the prospects of getting a visa?
In rare cases, particularly if lenders have proof that you are attempting to evade repayment, lenders may seek travel bans leading to disruptions in visa approval process.

Can money be deducted directly from my bank if I am a willful Education Loan defaulter?
Yes, with a court or tribunal order, lenders can attach a portion of your salary until the dues are cleared.

Is it possible to settle an Education Loan for a lesser amount after default?
Yes, you can opt to close a defaulted Education Loan through a one-time settlement as a last resort. However, settlements and loan write-offs drastically impact your credit score and impact future loan approvals.

Is default on a student loan subject to criminal prosecution?
An Education Loan default can bear criminal prosecution under circumstances when there is fraud. For example, producing false documents or selling off collateral without authorisation.