The dangers of defaulting

Queen’s students’ loan default rate is lowest in Ontario

Teresa Alm
Image by: Joshua Chan
Teresa Alm

In November, Macleans reported that last year one in three Canadian students relied on a federal student loan or line of credit issued by a major financial institution to help fund their education.

With over 350,000 students relying on financial assistance worth over $1.9 billion, defaulting on loans is a grim reality when it comes to the repayment process.

Defaulting means being unable to make payments on a student loan, line of credit, grant or bursary in the designated time frame.

According to the Ontario Student Assistance Program (OSAP) website, in 2003-04 23,298 loans were issued and 1,320 loans were in default. While the provincial default rate was 5.7 per cent, Queen’s default rate was significantly lower at 2.1 per cent.

When compared to universities across the province, Queen’s has the lowest default rate. The highest default rate—12.5 per cent—is held by Algoma University College. Default rates at colleges are far greater, with a provincial average of 13.6 per cent.

For students relying on OSAP, repayment begins after a six-month grace period starting the day of graduation. During those six months, the student must contact the National Student Loan Service Centre to make arrangements for repaying the loan. If repayment does not begin in the seventh month, the loan enters the default state.

This means the loan will be turned over to a collection agency and reported to a credit bureau. Interest will continue to accrue on the loan and students won’t be able to receive another loan while payment is outstanding.

Teresa Alm, Associate University Registrar for Student Awards, said the consequences of defaulting on an OSAP loan can follow a student for years after graduation.

A bad credit rating can prevent a student from receiving a bank loan. The years immediately following graduation are a crtical time, when students begin to make bigger purchases—such as houses, cars and businesses—that require bank loans.

Alm said there are several steps to take to avoid defaulting on a loan.

“One of the most important things a student can do to prevent this scenario is to keep the National Student Loan Service Centre aware of their current address and contact information,” she said.

Alm said if a student is encountering difficulties, the loan centre offers programs that can help. The interest relief program, for example, is designed to help students who are unemployed or underemployed manage their loans.

“They can keep their loans interest-free for a time period if they demonstrate financial need,” Alm said. The time period can range from six to 30 months, during which time the federal or provincial government will pay interest on the loan.

Another program to help avoid defaulting is the debt repayment in reduction program. In this case, the federal or provincial government will pay a portion of the student loan, reducing the overall monthly payments.

Besides OSAP and funding from Student Awards, another way many students accumulate debt is through a line of credit granted by a major bank.

Alm said Student Awards encourages students who are in financial need to apply for bursary assistance before applying for a line of credit.

“For various reasons, there are certain situations where we would advise students not to access additional loans over and above funding from OSAP,” she said.

Although Student Awards doesn’t have programs or assistance directed to students who need help repaying loans, Alm said they focus on helping students meet their expenses while they are studying and reducing the need to incur debt from sources such as banks.

In the past two years, Queen’s has seen a drop of 5.1 per cent in default rates. Alm said a crucial reason for this is that the government increased the amount of available student assistance to $11,900 and kept the repayable amount at $7,000.

Another reason was the University’s increased commitment to provide need-based assistance to those with the greatest needs and fewest options.

Mike Charlton, a personal banker and investor for the Kingston CIBC branch, said many students believe they’re getting an educational loan with a bank when, in reality, major financial institutions issue student lines of credit.

Unlike a loan, which is a set amount that has pre-determined monthly payments, a line of credit is a readily-available amount of funding that can be used at any time and accessed again once the credit the student has already used has been paid off. This increases the risk of default by allowing large amounts of money to be withdrawn.

While defaulted loans are a risk the major banks have to face, there are systems in place that they use to protect themselves if a loan goes into default. Unless a student makes a significant amount of money—more than $35,000—they must have a co-signer for a line of credit, Charlton said.

He said the bank treats students as regular clients in terms of defaulting.

“If they are going to default on a loan or line of credit they go through CIBC collections. At that level they try to work out a deal where typically the student will pay less and if a deal can’t be reached then they send it off to a private collections agency,” Charlton said.

Collections agencies can take money directly from a client’s wages and freeze their accounts, Charlton said.

“It would not affect their credit rating permanently, but it could take two to three years to get everything back on track in terms of financial well-being,” he said.

Some students go as far as declaring bankruptcy if the debt incurred has become too much to pay back. If bankruptcy is declared it can take up to seven years to re-establish a credit line, which can affect a person’s ability to purchase anything from a house to a car.

Charlton said those who have defaulted can still apply for a loan from a “B lender” such as MBNA or Capital One, but it would be a few years before one of the major banks would begin to lend him or her money again.

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