Reasons Why Education Loans can be Rejected

Every year, lakhs of Indian students apply for an overseas education loan. However, only a few manage to get funding from their lenders. The percentage of students who have lost funding because of an education loan refusal is much higher than the number of students who have successfully secured funding. Most of the time, candidates are unaware of the reasons behind an education loan refusal.

In this article, we will discuss some of the most common reasons for an education loan refusal and provide guidance on how you can get funding for higher education overseas or in India.

Some of the major reasons why lenders reject an education loan are listed below.

1. Poor CIBIL scores
2. Poor academic scores
3. Chosen country for higher studies
4. Chosen course for higher studies
5. Insufficient Application/documentation
6. Insufficient Credit History
7. Inadequate Income or Employment
8. High Debt-to-Income (DTI) Ratio
9. Lack of Collateral or Co-signer
10. Educational Institution Not Approved
11. Existing Default or Bankruptcy
12. Age Limitations

To those who have applied for any kind of loan previously, the CIBIL score may not be an alien subject. The Credit Bureau of India Ltd. or as it is famously called CIBIL is the major governing body that examines every loan applicant's credit score. This is done so in order to determine an applicant's worthiness to receive any particular loan.

When it comes to education loans, most lenders have very strict policies regarding the CIBIL scores of both, education loan applicants, as well as their co-applicants. If your CIBIL score is 700 or higher, you will be eligible for higher education loans. However, if your score is below 700, you may face approval problems. A high CIBIL score greatly improves your student loan options. 

If you’d like to know more about how CIBIL scores affect your profile, get in touch with our certified financial officer at WeMakeScholars to learn more. We also work on exceptional cases.

The application process to obtain an overseas education loan may seem easy to most of you. However, that is definitely not the case. Many students face education loan rejection due to their poor academic performance. So what can be considered by lenders as poor academic performance? 

1. Losing out on a year due to repeated failure in certain subjects leads to discontinuation of the course. This remark in a student's academic record can be considered poor academic performance.
2. The inability to complete your course on time is also counted as poor academic performance. However, when you apply for an abroad education loan through WeMakeScholars despite having such a profile, our team can help you find alternative ways of getting your higher education funding.
3. Most lenders have set certain benchmark scores for candidates in order to qualify for an education loan. Students who have completed their course after having scored less than 60% marks in their exams are less likely to get their education loan application approved by lenders.
4. Being debarred from appearing for qualifying examinations can also be a cause for education loan rejection.

This is one of the major factors behind why many students get their education loan applications rejected. It is important to understand that while many lenders, especially private ones promote the approval of an education loan for any country in the world, this is not the case in reality. Education loan lenders, both public and private, maintain a list of certain countries and courses for which an education loan is approved.

Some of the countries which are on the lender's list as the best countries for studying abroad include

1. The USA
2. Canada
3. The UK
4. Germany
5. Australia
6. New Zealand
7. France
8. Ireland

Students who have been admitted to universities from countries that have not rewound their education system have a higher chance of being denied an education loan, some of the countries are-

1. Ukraine
2. China
3. Afghanistan

Most of the education loan lenders in India have a specific list of courses for which they lend funding. Students who have secured admission into any of these courses are more likely to get approval from their respective lenders. 

1. STEM courses: STEM stands for Science, Technology, Engineering, and Mathematics. Students who have gained admission into international universities to study in any of the fields mentioned above are less likely to get their education loan application rejected.
2. Management courses
3. Other postgraduate level Degrees, diplomas, Certificate courses, etc.
4. Job-oriented courses
   It is important to note that although most lenders grant an education loan to students who have been accepted for postgraduate level courses, many of them (private lenders) do not approve of education loan applications for MBBS, and Ph.D. courses. 

More often than not, lenders do not provide specific reasons why an abroad education loan was rejected. Insufficient documentation is one of the most common reasons for an education loan rejection. 

Documentation is an essential part of the abroad education loan process. Especially when it comes to collateral education loans from government banks. When you pledge any of the 7 types of collateral securities against an abroad education loan, it is crucial that you provide the right documents pertaining to the asset being pledged as collateral.

The requirement for education loan documents differs from lender to lender. For example, the documents required by private lenders for an education loan without collateral are different than those required by public banks. This concept is explained well in Episode 30 of the Loanflix web series.

Lenders take the applicant's credit history into account when evaluating student education loan applications. It may be difficult to determine a borrower's creditworthiness if they have little or no credit history, which could result in rejection of education loan approval. Increasing your credit score through credit cards or small loans will greatly increase your chances of getting approved for a loan.

Why is Credit History Important for an Education Loan?

1. Risk Assessment: Credit history is one of the risk factors used by lenders to decide whether or not to lend money to you. A loan with a good credit history shows that you have a good track record of paying back your debts on time. This means that you are likely to be able to repay your education loan on time. A bad credit history suggests that you are more likely to default on your loan.
2. Interest Rates: Your credit history can have a big impact on the interest rate you are offered on your loan. If you have a good credit history, you can expect to pay lower interest rates on your loan, saving you money over the term of the loan. On the other hand, if you have a bad credit history, you may end up paying higher interest rates, resulting in a higher overall cost of borrowing.
3. Loan Approval: Most lenders consider your credit history when deciding whether or not to approve your loan application. If you have a good credit history, you are more likely to be approved for a loan, while if you have a bad credit history, your application may be rejected.
4. Loan Terms: In addition to the interest rate, credit history also influences other loan terms like the amount of the loan, the repayment term, and the repayment options. For example, a borrower with good credit may have better loan terms than a borrower with bad credit.
5. Cosigner Requirements: If you have limited or poor credit, lenders may need a cosigner with a good credit history to guarantee your loan. This gives lenders more confidence and may increase your chances of being approved or better loan terms.

Overall, good credit scores increase your chances of being approved for an education loan, may result in lower interest rates and more favorable loan terms, and demonstrate your ability to pay back your debts.

Lenders consider a borrower’s ability to pay back the loan as well as their income as a key factor in their decision-making process. If a lender finds that your income is low or volatile, it can lead to a loan refusal. Showing a stable income or having a stable income co-borrower can help boost your loan application.

1. Insufficient Income: Lenders want to know that the borrower has enough income to pay the loan back. If the borrower’s income isn’t enough to pay back the loan, it raises doubts about their ability to meet their financial obligations.
2. Unstable Employment History: Lenders like borrowers who have steady jobs because it shows they have a steady source of income. If you have frequent job changes or periods of unemployment, lenders may be hesitant to lend to you.
3. Risk of Default: Lenders reject loan applications when income is low or employment is unpredictable. Lenders reject applications to reduce the risk of loan default and protect their investment.
4. Debt-to-Income Ratio: Lenders consider the borrower's debt-to-income ratio, which compares their monthly debt payments to their monthly income. If the ratio is too high due to inadequate income, it indicates the borrower may struggle to manage additional debt.
5. Creditworthiness: Even if you have enough income, bad credit scores can mean you won’t be approved for a loan. Lenders use your credit score to assess your ability to manage your debt.

A high debt-to-income (DTI) ratio means that a large chunk of your income is going towards repaying your debt. Lenders like borrowers with a DTI below 30% to make sure they can afford to make extra loan payments. It’s best to pay down existing debts or reduce your debt load before applying for student loans.

A high Debt-to-Income (DTI) ratio can have several consequences, particularly when applying for loans:

1. Loan Denial or Higher Interest Rates: If you have a high DTI, lenders may be reluctant to lend to you because it indicates that you already have a large portion of your income set aside for debt repayment. If loans are approved, you may have to pay higher interest rates to compensate for the perceived risk.
2. Limited Loan Amounts: Even if you qualify for a loan, borrowers with a high DTI may be at a disadvantage in terms of loan amounts compared to borrowers with a more favorable ratio. Lenders are less likely to lend large sums of money to people who already have high debt-to-income ratios.
3. Financial Strain: Debt-to-income (DTI) is a measure of how much of a borrower’s income is being used to pay off debt. A high DTI can put a lot of strain on your finances, leaving you with less money available for essential living costs, savings, or emergency expenses.
4. Difficulty in Meeting Obligations: With a high debt-to-income (DTI) ratio, it can be difficult for borrowers to keep up with all of their monthly payments. This can lead to late payments, penalties, and damage your credit score, making your financial situation even worse.
5. Impact on Credit Score: Debt-to-utilization (DTI) is a measure of a borrower’s debt-to-credit ratio. DTI is a measure of how much debt a borrower has compared to the amount of credit they have available. A borrower with a high DTI has a higher likelihood of defaulting on their loans, which lowers their credit score and makes it more difficult for them to borrow money in the future.

Some student loans require you to provide collateral or have someone else co-sign your loan application. If you can’t provide collateral or can’t find a good credit-worthy co-signer, your loan application may be denied. Explore loan options that don’t require co-signers or collateral. 

1. Approval Odds: For borrowers who don’t have a lot of credit or income, they may need a loan cosigner. Without one, they may struggle to get approved for a loan, particularly if they don’t meet the lender’s criteria for credit and income.
2. Interest Rates: If you have a good credit score with your cosigner, you may be able to get better interest rates from lenders. If you don’t, you may be asked to pay higher interest rates to make up for the higher risk to the lender.
3. Loan Amounts: Some lenders may restrict the loan amount to those borrowers who do not have a co-signer. The reason for this is that the lender may not have faith in the borrower’s ability to pay back the loan without co-signers.
4. Repayment Terms: If you don’t have a co-signer, you may have less control over the terms of repayment, such as how long you’ll have to pay back or how long you can defer payments.
5. Credit Requirements: Borrowers who do not have a cosigner may be subject to more stringent credit checks, as lenders take on more risk by lending to individuals without collateral.

Note: You can refer Education Loan Without Collateral 2024 for more information regarding how to get an unsecured loan. 

Some lenders list approved colleges and universities on their websites. If your preferred school isn’t listed, your loan may be denied. Ask your lender if your preferred school is eligible for the student loan programmes.

1. Accreditation Standards: Lenders may view an institution as a higher risk if they are not accredited by an accrediting body. An accrediting body is a body that certifies an institution for its quality and academic standards.
2. Eligibility Criteria: Some student loan programs, like federal student loans across the U.S., have eligibility requirements that require you to attend an approved or accredited institution. If your institution isn’t accredited or approved, you may not be eligible for some loan programs.
3. Repayment Assurance: Lenders want to know that you can use your education to get a job and pay off your loans. Going to an unaccredited or unapproved school may raise questions about the value of your education and your ability to repay your loan.
4. Regulatory Compliance: Lenders may be governed by laws and regulations that mandate that loans be used for education purposes at accredited institutions. Lending to unaccredited institutions could run afoul of these rules and put the lender at legal or regulatory risk.
5. Risk Assessment: Lending decisions are frequently influenced by risk factors. Lenders may view loans to unsecured institutions as more risky investments because they are worried about the institution’s stability, reputation or long-term financial health.

A history of loan defaults or bankruptcy can significantly affect your credit score. As a result, lenders are hesitant to lend to borrowers with such a record, making it more likely that you will be denied a student loan. Therefore, it is important to resolve outstanding debts or improve your credit score before applying for a new student loan. 

Existing default or bankruptcy can significantly impact student loans in several ways:

1. Credit Score: Defaulting on a student loan or declaring bankruptcy can severely damage your credit score. This can make it difficult to get future credit, like a loan or credit card, and you may end up paying higher rates if you’re approved.
2. Legal Action: A student loan lender may take legal action against you if you default on the debt. In order to collect the unpaid debt, they might file a lawsuit against you. If they win, they might take your assets or seize your salary.
3. Co-signer Responsibility: The Co-signer might be held responsible for the debt if you default. This can strain relationships and negatively impact the co-signer's credit.
4. Federal Student Aid Eligibility: If you fail to repay federal student loans, you will lose eligibility for federal student aid programs in the future, such as grants, loans and work-study programs.
5. Bankruptcy Discharge: A bankruptcy discharge is a legal order that exempts the debtor from paying certain types of debts owed to creditors prior to filing for bankruptcy.
6. Interest and Fees: If you don’t pay back your student loan, you’ll owe interest, fees and penalties, which add up to the total amount that you need to repay.

Some student loan programs have age restrictions, and if your age is below the age limit, your loan may be denied. Check the eligibility criteria before applying for student loans, including age restrictions.

1. Minimum Age: Many lenders require you to be 18 or older to sign a loan agreement. So, the age limit for an education loan application is usually 18.
2. Maximum Age: Some lenders may set a maximum repayment term for borrowers, usually based on how long the loan repayment term is expected to last. For instance, some lenders may require you to repay the loan by a certain age (e.g., before reaching retirement age).
3. Parent PLUS Loans: In the U.S., Parent PLUS Loans are federal student loans for dependent undergraduate students. There are no age restrictions for borrowers. Parents must meet other eligibility requirements, including not having a bad credit history.
4. Private Loans: Private education loan providers have their own age limits, which can vary significantly. Some private lenders may set maximum age limits for borrowers as well as cosigners.
5. Government-Sponsored Loans: Government-run education loan programs don’t usually have age restrictions. However, depending on the loan program you’re applying for, your eligibility may be different. For example, if you’re looking to borrow money, you’ll likely be able to apply for U.S Department of Education (USDOE) education loans.
6. Continuing Education: Age limits may be lower for some education loans, for example, for continuing education loans or for professional development loans, as people may go on to study later in life.

At WeMakeScholars, the financial team keeps a track of the changes in the education loan market and guides the loan applicants accordingly. Thousands of students who stood no chance of getting an education loan under any circumstances were able to secure one successfully without any hassles because they approached the WeMakeScholars team to accompany them on their journey.

So what are you waiting for? Request a callback today and get your education loan in a hassle-free manner, without paying anything in return for the services.