Consequences of Student Loan Default

A student loan is granted by banking and finance organizations to help students undertake costly educational courses. Usually such a loan is availed when tuition fees of universities or educational institutes are rather high. In many countries this kind of loan is also aided by government grants that subsidizes the burden of the loan for students who have outstanding academic achievements. The students loan is usually a secured loan, meaning that it is backed by a collateral, i.e.: an asset pledged by the borrower. The rate of interest of this loan is on an average, low. In certain cases, the repayment period starts after the student completes his course. In such cases, if the loan is not aided by grants, then, the rate of interest tends to be higher. On the other hand, there are also some lenders who prefer to start, the repayment period after the student commences the educational course.

What is a Loan Default?

During the sanctioning process of the loan, the applicant and lender become party to a contract or a negotiable instrument titled as ‘promissory note’. According to the contract, lender has authority to sell the collateral and recover losses, in case the applicant or borrower is unable to return the said amount along with its appropriate interest. Some lenders believe in extension of the repayment period. Loan default normally occurs due to insolvency, or in certain instances bankruptcy. Laws regarding default of a loan vary from nation to nation. It may also vary from case to case. Laws, governing loans and credit creation, in most nations, state that the loan is a default when there is no payment for 270 days.

Consequences of Student Loan Default

A student loan is said to have been defaulted, when the student is not able to pay back the said amount. In some nations according to the law, the student becomes a loan defaulter, when he or she is unable to pay any amount to the lender, for span of 270 days. The biggest consequence or drawback of such a situation is that, the borrower’s credit history is affected forever. The lender may resort to legal action to recover losses or might sell the collateral or security. In some cases, if a major part of the loan has been repaid, then the period of the loan is extended. In such a situation, rate of interest multiples and the loan becomes very costly. Some other drawbacks accompany the debt. If the defaulter wants to take up another student’s loan in near future, it almost becomes an impossibility.

Rehabilitation of Default

Default rehabilitation, refers to paying back the debt and improving one’s credit history. Rehabilitation can be done in many ways. The most common way is selling the collateral and paying back the interest. Some students also prefer to avail a consolidation loan. A consolidation loan is a long-term loan, backed by a guarantor. It also has a low rate of interest. The consolidation loan, however, is not very healthy for credit history and ratings.

Many services are available for rehabilitation of default. However, the best hassle free and risk free option for students availing a student loan, is to study hard and get a good score throughout the course of education. This eventually helps in getting a very good job with an excellent remuneration, that helps to facilitate the repayment of students loan.

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