What Happens to Your Credit Score if You Default on Student Loans?
Canadian post-secondary students are facing a crunch like never before. The average student graduates with an estimated $25,000 in government-issued debt, and your ability to repay it can have a lasting effect on your credit score.
In Canada, government student loans are doled out by the federal Canada Student Loans program or your home province/territory (or both, depending on where you live). As of Nov. 1, 2016, graduates aren’t required to begin repaying their Canada Student Loan until they’re earning at least $25,000 a year. However, interest does accrue during this time.
Provincial loans typically offer a six-month grace period after graduation before repayment is required. Some provinces, such as Ontario and Alberta, don’t charge interest on the provincial portion of your loan during this time.
Payment history is the largest component of how your credit score is calculated (35%). Your credit score initially takes a hit when you assume a loan totalling thousands of dollars, but will begin to improve as long as you make payments on time, every time. Unfortunately, it’s incredibly common for Canadians to default on their student loans: in recent years, the federal government has stepped up its efforts to collect outstanding debt after write-offs reached $312 million in 2012 and $295 million in 2015.
If you miss payments for more than 270 consecutive days (nine months), your loan falls into default and is transferred to the Canada Revenue Agency (CRA) for collections. Not only will you rack up hefty penalties and destroy your credit score, but you can’t escape the long arm of the taxman: the CRA can withhold your income tax refunds, or refer cases for legal action to garnish your wages and seize assets.
There’s a lot of confusion around repaying and writing off student loans. Here’s how it works:
- Legally, there are time limits for collecting unsecured debt. If six years pass with no payments or acknowledgement of your debt, your Canada Student Loan is written off. Each province and territory has its own statute of limitations for loans.
- If you’ve been out of school for at least seven years, Canada Student Loan debt can be eliminated if you file for personal bankruptcy. This should be your absolute last-ditch option; bankruptcy stays on your credit report for 10 years and can knock hundreds of points off your credit score. You’re better off seeking repayment assistance (see below).
These options aren’t get-out-of-jail-free cards: your debt is eliminated, but your credit profile is ruined. With derogatory marks on your credit report and a low credit score, you’re unlikely to be approved for any future loans (credit cards, a mortgage), rental housing, and even some types of jobs that require credit checks. Unless you plan to live a Carmen Sandiego-style existence off the grid in Europe, it’s completely against your current and future interests to default on your student loan.
Lenders want you to repay your loan, so they’re often willing to work with you. The key is to seek help before you fall behind on your payments. Whether you’re a new graduate or still chipping away at years-old student debt, here’s what you can do to keep your situation under control:
- Apply for repayment assistance. If you foresee being unable to make your payments, the National Student Loan Services Centre (NSLSC) has a few different programs. Depending on your situation, you may qualify for a reduced monthly payment, partial interest relief, or loan forgiveness. Note: you can’t apply for repayment assistance if you’re more than 90 days delinquent on payments.
- Rehabilitate your loan. If you’ve defaulted on your Canada Student Loan, you can contact the NSLSC to have your loan “rehabilitated.” If you meet the three requirements, your loan is transferred back to the NSLSC from the CRA and will no longer be in collections. If you have a student loan through your home province or territory, contact your local student financial aid office to find out your options.
- Keep paying your other bills. You might be eager to throw as much money as possible at your student loan to whittle down the balance, but remember to keep enough money on hand to pay your cell phone, internet, utilities, car loan, and credit card bills on time — these are all part of your credit score.
Whatever you do, don’t do nothing — dealing with a mountain of debt can feel paralyzing, but it gets worse the longer you ignore it. As you work toward paying off your student loans, you should check your credit score at least once a year. Once you’re on track (or back on track) with regular, on-time payments, your score will begin to improve.
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