Monday, 12 November 2012

Uh oh, Default! (Student Loan Defaults)

One of the most excrutiating experiences one can have with a student loan is when your loan goes into default.   What does it mean when your loan goes into default?  This means that you no longer are making your payments on time or regularly.  This was the reality for me at one point as I didn't have a stable job and as a result could barely afford rent, food and power, so I didn't really have enough cash left for anything else, let alone my student loan.  Of course once your loan goes into default, things get a bit bizarre!

What do I mean?  Well when you first get a student loan, you usually get a federal part of the loan and a provincial part.  At the time when you are using  your student loan, you don't notice any difference as you get your full loan through your bank.  Yes, the bank actually signs off on the loan along with your educational institution and once the bank processes the paper work, you get your money usually in couple of parts.  Now once you get behind on your loan payments, the bank will try to collect for a short period of time (phone calls, letters).  However, after a period of time they'll send the loan to collections for them to collect on the loan. 

Now that's not good, but it gets even worse. The bank can send the Federal part back to the government to collect on,  one of the provincial loans to a collections agency and if you had another provincial loan to another collections agency.  Now just imagine,  one collector can become two,three! (Or...more!)  Now, yourproblems multiply as each will agressively try to collect their portion of the loan.  So now you more mail, more phone can get crazy.

Talk about being overwhelmed and shocked.  When applying for a student loan, you might not realize that you're actually taking loans from multiple creditors.  You think that you are just getting a government student loan and  not potentially servitude to a number of 'masters'.  But that's what happens when you are young, and not financially educated about the nuances of student loans.  It's not a position you want to be in.

Another downer of this scenario is that you might not know what you really owe as you might get a letter from the government showing a loan amount. You might think it's your total loan amount.  However, it's only your federal loan (which is you largest portion) and your provincial loan (s) are still out there with only a phone call or letter away from financial mayhem.

Lastly,  even though your federal loan will not show up on a credit report, your provincial loan does and this does affect your credit rating!  This could cause you to not be able to lease a car and get a credit card at "loan shark" rates.

So the moral of the story is that you have to be mindful when taking on a student loan.  You have to know who your creditors are and make sure you can cover your loan payments after you finish university.  This mean you need to make sure you have a plan on how to pay it back (not just say, "I 'll get a job after I graduate").  Because if you do not have a plan and you get behind and default on your student loan, life then gets a bit more hairy and you do not want that.