Default: the D word…
Q. What does default mean?
A. It means you've fallen so far behind in your student loan payments that your loan will now go to collections.
Q. If you default on student loans, does that mean you won't have to pay?
A. No, you still have to pay. But instead of having to pay your original lender directly, you'll deal with collections agents. Basically what happens is, once you default on your loan, the loan gets handed to a collection agency that specializes in pursuing people for payment.
Q. Would the payment terms be easier?
The collection company may end up accepting smaller payments than your original lender, but normally they'll also be piling on interest charges. Many people who default end up with student loans that are double or triple what they originally borrowed. That's because all their money goes to interest costs and they can't even keep up with that.
If you could instead stay out of default long enough to get debt reduction, you'd end up with smaller payments as well as cutting the size of your loan.
Q. How long do you have before your loan gets defaulted?
A. Different student loans have different default limits. You need to check this with your lender. Your friends might think they know, but they might have a different type of loan.
For example, today's direct-lend Canada student loans don't default for 270 days, but direct-lend BC loans default in 150 days, and loans from earlier eras such as guaranteed and risk-shared loans can default in 90 to 180 days.
The most common formula across Canada for newer loans now is 270 days. But with so many different rules out there, don't assume you have this much time. Check it out.
Q What really happens if you 'default' on student loans?
A. It seriously messes you up. A default normally shows up on your credit report and cleaning up your record can take years. You're also disqualified from future student loans and also from student loan financial aid programs such as interest relief and debt reduction or loan remission. In the meantime, your debt keeps growing from interest charges.
You also risk legal action to collect. However, normally what happens is you get stress-causing phone calls from collection agents at your home and place of work. Either they get the money directly over time or the government takes it back through income tax/GST refunds and (if you work for the government who lent your loans) part of your wages.
There are some alternatives after years of this, such as consumer proposals and, eventually, bankruptcy. However, the easiest option is to not default in the first place.
Q. What if I'm only behind in payments because of someone else's mistake – like a mislaid application for interest relief?
A. Falling behind means they flag your loan record, which could eventually get to your credit report. If you fall far enough behind, you might not be able to get loan aid – even though you haven't actually defaulted. In this case, you'll have lost your 'good standing,' that is, until you pay what's overdue.
So it's safer for you to make up for the missed loan payments even if they were missed because of someone else's mistake. You need to keep your good standing and stay clear of default.
Document the details while your memory is fresh. Then, once the payments are up to date, show your lender this was caused by someone else's mistake. Ask them to show that on your record and, if you shouldn't have had to pay, ask them to return your money.
Q. If you've fallen behind, how do you stay out of default?
A. If your loan has not yet been handed over to a collection agency, talk to your lender and explain your situation. If you can pay enough money to get your loan back to 'good standing' you may be able to access student loan aid programs to keep you out of default.
Q. What if you're already in default? Can you get back out?
A. The federal and some provincial governments now have a 'reinstatement' process that will get you out of default. This may help you control your debt by making you eligible again for student loan aid programs. It isn't easy, though. Regular payments must be made over time and you may have to pay all the interest owing on your defaulted loan.
Reinstatement from default is a growing issue. Governments are now starting to give more information about how to get reinstated. See BC's information guide/application form in Application Forms and watch for more to come on this topic on Debt 101.
If you are in default, you should also look at the “In Crisis” section of Financial Aid: Student Loan Advice.