What Do You Mean By Student Loan Forgiveness And How It Works?

Most people believe that dedication, willpower, and intelligence are the crucial factors needed for pursuing higher education. However, one of the most crucial requirements for higher education is money. To obtain the necessary funds, taking out a student loan is the best option.

A student loan can cover various expenses, such as tuition fees, accommodation fees, equipment fees, library fees, and laboratory fees, eliminating the need for additional loans. Furthermore, there is a long repayment period of up to 15 years after completing your studies.

Repayment of Student Loans in India

Despite the advantages, repayment of student loans remains uncertain, as sometimes students may not complete their education or secure a well-paying job. According to the Reserve Bank of India (RBI), the student debt in India amounts to Rs 1,45,785 crore as of August 26, 2022.

For students, who rely on student loans to access education, it becomes challenging to repay the loan, and lenders may take action to recover their money. In India, there are specific rules and regulations regarding student loan repayment but many underprivileged students face heavy pressure to repay their loans in absence of job security and high interest rates.

It is noteworthy that the rate of Non-Performing Assets (NPA) or bad loans has risen in public sector banks in the past few years, especially after the Covid pandemic caused many people to lose their jobs and income. Consequently, there has been a significant drop of about 25% in the number of education loans issued in India.

This indicates that banks have become more cautious about granting loans to students without collateral or security beyond a certain amount, as they fear that the loans may not be repaid. “This rules out the chance of the financially less privileged students to opt for higher education and discourages them to pursue education,” Nirmalya Samanta, Associate Professor, Delhi University, said.

Therefore, although student loans in India offer numerous advantages, in the event that the above mentioned circumstances occur and you are unable to make your EMI payments, what actions will the lender take? What do we mean when we say student loan forgiveness in India and how it works? Is it okay to forgive a student loan? Let’s dive into the topic:

Also Read: 5 Things You Should Know Before Cosigning a Student Loan

What is Student Loan Forgiveness?

Student loan forgiveness is a financial relief program that eliminates a borrower’s private student loan debt (or part of a debt) — relieving the borrower of the obligation to repay it.

Although any student loan can theoretically be forgiven, the student loan forgiveness program is generally not available in India for borrowers who take education loans from banks or NBFCs (Non-Banking Financial Companies). There are several reasons why Indian banks and NBFCs don’t consider student loan forgiveness as an option:

• Lack of legal framework: Unlike in some countries like the US, where there are federal laws and regulations that govern student loan forgiveness programs, there is no such legal framework in India that allows banks or NBFCs to write off student loans without affecting their balance sheets or credit ratings.
• Risk of moral hazard: Banks and NBFCs may fear that offering student loan forgiveness may create a moral hazard problem, where borrowers may have less incentive to repay their loans or pursue productive careers if they know that their debt will be forgiven eventually.
• Low recovery rate: Banks and NBFCs may also face difficulties in recovering their loans from borrowers who default on their payments or migrate abroad. According to some reports, the recovery rate of student loans in India is around 50% to 60%, which is lower than other types of loans.

Eligibility Criteria for Student Loan Forgiveness Programs

For students seeking loan forgiveness, eligibility typically depends on several factors. These may include the borrower’s family income level, with priority given to those from economically weaker sections. Additionally, the student must often be enrolled in a government-recognized institution and pursue a course that qualifies under the specific forgiveness program. Other criteria can involve academic performance standards or specific service commitments, like working in rural or underserved areas after graduation. Students or their guardians must provide proof of financial hardship, disability, or other qualifying conditions when applying through the lending bank or institution.

How Does Student Loan Forgiveness Work?

Student loan forgiveness typically involves the partial or full cancellation of outstanding loan amounts under specific conditions. To qualify, students must first meet eligibility criteria set by the loan forgiveness program, such as demonstrating financial hardship or completing a required period of service in underserved areas. Once the conditions are met, students need to apply for forgiveness through their lender or a government agency. The loan amount eligible for forgiveness is then reviewed, and if approved, the remaining balance is either partially or fully written off, easing the financial burden on the borrower.

Student Loan Forgiveness Pros & Cons

Why Student Loan Forgiveness is Not a Good Idea in India

Student loan forgiveness may sound appealing to many borrowers, but it may not be a good idea for Indian students. Here are some reasons why:

• It could create moral hazard and encourage irresponsible borrowing and repayment behaviour. If students expect their loans to be forgiven in the future, they may borrow more than they need or can afford, and default on their payments without consequences. This could undermine the credit culture and financial discipline of borrowers.
• It could impose a huge fiscal burden on taxpayers and banks. The cost of forgiving student loans would have to be borne by either the government or the lenders, which would reduce their resources for other public goods or productive investments. For example, India has repeatedly waived loan repayments for many of its small and marginal farmers, but this has not improved their welfare or productivity.
• It could jeopardize the availability and sustainability of student loans for future students. If banks lose money due to loan waivers, they may become reluctant to lend to students in the future or charge higher interest rates and fees to cover their losses. This could limit the access and affordability of higher education for many deserving students.

Therefore, instead of considering student loan forgiveness in India, it may be better to explore other alternatives that can help students repay their loans without compromising their financial well-being or career prospects.

How NBFCs are Helping Financially Less Privileged Students in India?

Student loan forgiveness plans, in some countries, are designed to help financially less privileged students who would have trouble making payments within the standard time frame. In India, NBFCs help students plan their repayment options, improve their credit scores and support their dreams to afford higher education by offering flexible terms and conditions.

Some of the benefits of taking student loans from NBFCs are:

• No limitations on the coverage: Unlike banks that only cover specific expenses related to academics, NBFCs cover all expenses related to education such as tuition fees, living expenses, travel costs etc.
• Faster processing and disbursal: NBFCs have simpler documentation and verification processes than banks which reduces the time taken for approval and disbursal of loans.
• Customized repayment options: NBFCs offer various repayment options such as moratorium period (a grace period during which no payments are required), prepayment facility (paying off some or all of the loan before due date), step-up repayment facility (increasing monthly payments over time) etc.
• Lower interest rates: NBFCs offer competitive interest rates compared to banks depending on factors such as credit score, collateral value etc.

What happens if Student Loan is Not Paid on Time?

1. Always overdue

When you borrow money from a lender or bank, you are expected to repay it within a specific time frame, along with interest, in the form of Equated Monthly Installments (EMIs). Assuming that you have missed one or more EMI payments, it can create a pattern of you being always overdue. This means that you have a habit of paying your dues late, and it can have a significant impact on your financial health.

2. Negative impact on your credit score

Missed payments are reported to all credit bureaus by banks and NBFCs. Whenever you apply for a loan in the future, whether for personal or business use, the lender will check your track record. If you default on any loan, your credit score will significantly deteriorate. While the score is downgraded immediately, it takes a long time for it to improve.

3. Future borrowing capacity is limited

Your future borrowing capacity is limited. Potential lenders may reject your loan application after reviewing your credit history and noticing unhealthy repayment behaviour. This could result in being unable to secure a loan in the future or being offered a loan with a higher interest rate. This can be particularly detrimental when you need to borrow funds for emergencies or for your family.

4. Lender can take your Collateral

In the case of secured loans, the lender has the right to take any collateral you give as security. For example, if you used your car as collateral, your lender can seize your vehicle. They can also take any other property that had been offered as security.

5. Legal action

Your lender has several legal options to recover the money. Cheque bouncing is a criminal offense and can land you in prison. Additionally, the lender may use arbitration or SARFAESI to take possession of your property and auction it to recover the dues. If the sale of the asset is not sufficient to repay the full amount, the lender can file additional suits to recover the shortfall/balance amount.

Varthana will lend money to students to study nearly anything as long as the course and institution are approved by the relevant authorities or have a good reputation. Students with a good academic record and most importantly Indian citizens will be eligible for the domestic education loan. Those who have been accepted to career-oriented courses such as Medicine, Engineering, and Management at the graduate or postgraduate level are also considered.

Conclusion

Student loan forgiveness in India offers relief to borrowers by canceling part or all of their educational debt under specific conditions. It generally works through various programs that require meeting criteria such as income levels or employment in certain sectors. Although it provides significant financial relief and flexibility, it is essential for borrowers to understand the eligibility requirements and potential tax implications. Properly navigating these programs can ease financial burdens and support long-term career goals.

FAQs

1. Who Pays for Student Loan Forgiveness?

Student loan forgiveness programs are typically funded by the government or specific organizations. The cost of forgiven loans is often covered through taxpayer funding or by reallocating existing budgetary resources.

2. How Do I Get Loans Forgiven?

To get loans forgiven, borrowers must apply for forgiveness programs and meet specific eligibility criteria, such as income thresholds or employment in designated fields. The process involves submitting required documents and waiting for approval from the relevant authority or lender.

If you need financial assistance for your education, whether at the PU level, undergraduate, or postgraduate studies, Varthana’s student loans are an excellent option. They provide a straightforward loan process and flexible repayment terms, allowing you to concentrate on reaching your career goals.

3. Can Student Loan Interest Be Forgiven?

In most cases, student loan forgiveness programs focus on cancelling the principal balance rather than interest. However, some programs may offer relief from accrued interest under specific conditions.

4. What Types of Loans Are Eligible for Forgiveness?

Eligibility for loan forgiveness usually includes federal student loans, such as Direct Loans and Perkins Loans. Private loans and certain other types of education-related debt are generally not eligible for forgiveness.

5. How Do I Know If My Student Loans Were Forgiven?

Borrowers will be notified by their loan servicer or the relevant forgiveness program once their loans are forgiven. Regularly checking account statements and contacting the loan servicer can help confirm the status of the forgiveness.