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 calls...it 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.

What is debt? What one cab driver taught me

Definition of Debt
I thought I would start this off by going to dictionary.com and defining the word "debt".  Here's what I found:

1. something that is owed or that one is bound to pay to or perform for another: a debt of $50.

2. a liability or obligation to pay or render something: My debt to her for advice is not to be discharged easily.

3. the condition of being under such an obligation: His gambling losses put him deeply in debt.

4. Theology . an offense requiring reparation; a sin; a trespass.

So why did I put this here?  Well, I think it shows one of the root problems of being caught in the snare of student debt which is that many do not understand that student loan debt is something that you owe and are obligated to pay back.  Now some might say that I don't know what I am talking about and that everybody knows that a student loan is debt but think about it for a moment and while you do, I'll give you an example.

What one wise cab driver taught me about debt

About 10 years ago at my previous job I met a client who had two sons.  He was from the middle east and was trained as an engineer but when he came to Canada, his credentials weren't recognized and so he ended up driving a cab and was struggling.  He said his sons are working so they can go to school and he was doing all he could to help them and trying to make money to help put them through school.  I said why don't you tell your kids to get a student loan? (Remember, I was deep in student loan debt back then.)  He looked at me with a stern and serious look and said, "How could I as a father allow my kids to take on a small mortgage?  They aren't ready for that kind of financial obligation.  As their father, I can't do that to them and I won't." 

"Wow!"  I said to myself and the reality of a student loan hit me like a ton of bricks.  At that point, I realized that I have a small mortgage to pay back and that's a big commitment that you pay because a mortgage is debt in a big way.  

Student Loans Equal Debt

 And that's the problem, you are never told what a student loan really is.  For example,  I remember guidance counsellors saying, "just get a student loan" like it's no big deal.  I remember the loan forms being passed around like candy at school.  Also, there were no classes or units that talked about student loans and the ramifications of them.  Even my parents said get a student loan.  One parent knew nothing of student loans but wanted me to do better, as she'd always struggled to keep us afloat.  And the other parent simply didn't care. He just said casually to get a student loan.  There's nothing casual about a student loan.  Unfortunately, I think a lot of us were told similar things and got duped.

So when you think of a student loan as debt - and serious debt like a mortgage - that you have to pay back your mentality changes.  If you have a mortgage, you make sure that you make the payments each and every month.   And prior to getting a mortgage you think about how you'll repay it as opposed to saying that "I'll get around to it after graduation and once I get a job."  Also, with a mortgage you realize that you owe the bank money they lent you to purchase your home and know that you have to pay them or there could be consequences.  A lot of people got student loans (me included) and treated it as "free" money and never really gave thought to the consequences of taking on a debt that equals a small mortgage.

So if you are thinking of taking a student loan in the near future, remember the cab driver and hope that you have a parent, friend, teacher or someone smart enough to recognize what a student loan truly is: debt.