Faced An Accident Abroad? Here’s What Happens to Your Education Loan

Seeking higher studies overseas is a milestone experience for most Indian students. Nevertheless, accidents or unforeseen illnesses can occur, affecting not just the health of the student but also his/her education loan repayment. It's important to know how education loans are managed during such events and what precautions can be adopted.

The Role of Education Loan Insurance

Education loan insurance is a buffer for borrowers. In case of untimely death or permanent disability of the borrower, the insurance helps cover the balance amount of the loan, sparing the family the obligation to repay it. Although it is not required for every loan, it is insisted on by several lenders, particularly non-banking financial companies (NBFCs), in the case of unsecured loans. The cost of such insurance generally ranges between 0.5 per cent and 2 per cent of the loan value and is usually made a part of the total amount disbursed in the loan, obviating the necessity of an additional payment.

"Permanent events such as death or irreversible disability decrease the chances of repayment. For these unfortunate circumstances, insurance included within education-loan agreements is used for repayment. The claims are used for the repayment of the outstanding balances through the borrower's loan-insurance policy," explains Ankit Mehra, Co-Founder and CEO of GyanDhan.

However, such insurance policies often come with exceptions. As Mehra points out, "Insurance also comes with strict exclusions of suicide or self‑inflicted injury, unapproved pre‑existing mental health conditions, voluntary drop‑out absent a formal suspension order, misconduct or fraud unrelated to covered events, and acts of war, terrorism, or civil unrest."

Role of Co-Signers in Loan Contracts

Almost all education loans, particularly loans for overseas study, call for a co-applicant or co-signer, typically the guardian or the parent-such an individual shares equal responsibility for the loan repayment. In case of the major borrower's failure to repay, given some untimely mishaps, then the co-signer is duty-bound to go ahead with the repayments. It is necessary then that the co-signers financially prepare for such eventualities and know about their duties well in advance.

Alternatives to Loan Deferral and Restructuring

Where a borrower is experiencing transient difficulties from either health reasons or other exigent circumstances, lending institutions may accommodate alternatives such as loan deferment or restructuring. Deferment permits the payment of a short-term hiatus followed by resumed regular payments to reestablish a foothold while awaiting recovery. Restructuring can include amending the loan structure to accommodate improved repayment capacity. These alternatives are normally reviewed on an individual basis, and borrowers or their families must notify the lender immediately to discuss possible solutions available.

As Mehra notes, "Generally, short-term situations, like deportation, severe illness, revocation of a visa, or suspension from school, don't just remove the education-loan burdens. Lenders make a case-by-case evaluation and request the certified documents, i.e., hospital certificates, university suspension letters, or immigration orders. On verification, discretionary relief steps in the form of an extension of the moratorium, temporary reduction of EMI, or tailored partial-repayment plans can be offered."

He cautions that such relief is not guaranteed: "Such relief is based solely on the genuineness and adequacy of the evidence furnished and is not automatic or instantaneous."

Travel and Health Insurance

In addition to loan-specific insurance, students are also encouraged to purchase comprehensive travel and health insurance during their foreign studies. These policies can address medical emergencies, hospitalisation, and even repatriation in extreme conditions. Certain travel insurance policies also include coverage for trip cancellations or interruptions, which may prove useful if unexpected circumstances derail the student's educational plans.

Measures for Students and Families

To protect against possible financial burden caused by unexpected circumstances overseas, students and their parents should:

• Choose education loan insurance: This ensures financial protection and peace of mind.

• Know the co-signer's responsibilities: Make sure the co-signer understands their role and is financially able to make repayments if needed.

• Communicate openly with lenders: If any problems arise, immediately notify the lender to explore potential solutions.

• Invest in wide-ranging travel and health insurance: This may help cover various emergencies and limit out-of-pocket costs.

"Strict verification protocols apply throughout to ensure accountability and prevent misuse. However, lenders do try to mediate a solution and provide the best possible solutions," says Mehra.

He also advises students to act early. "Borrowers are advised to maintain proactive communication with lenders and arrange the asked documentation in advance, as relief measures remain rare privileges rather than guaranteed entitlements."

Though studying abroad brings great chances, it is also important to be ready for unforeseen difficulties. Knowing the implications of education loans and the safety nets involved can assist students and their relatives in tiding over challenging times more confidently and securely financially.