What Happens When Your Student Loan Is In Collection?

Understanding the Consequences of Student Loan Collections

When you borrow money to fund your education, you enter a binding agreement to repay the loan. What happens when your student loan is in collection? In this article, we delve into the implications of falling behind on student loan payments, the procedures for collection, and the strategies for addressing debt in arrears.

Recognizing the Types of Student Loans

In many countries, such as Canada, student loans are either government-issued or private. Understanding the type of loan you have is crucial as it dictates the repercussions and collection strategies employed when a loan is defaulted.

Government Student Loans

Government student loans can be federal, provincial, or a hybrid of both. For example, in Ontario, there are three main government loans: Canada-Ontario Integrated Student Loans, Canada Student Loans, and Ontario Student Loans (OSAP).

Private Student Loans

Private student loans are typically provided by banks in the form of student lines of credit or student credit cards. The terms of these loans differ significantly from government loans.

The Collection Process for Student Loans

Failing to repay your student loan can result in your debt being transferred to a collection agency. However, the process varies depending on the type of loan and the region you reside in.

Canada Student Loans

If you neglect to make payments on your Canada student loan for nine consecutive months, your debt is transferred to the Canada Revenue Agency (CRA) for collection. The CRA has extensive powers for debt collection, which we will discuss in detail later in the article.

OSAP Loans

In Ontario, if you fail to make the necessary payments on your OSAP loan for 270 days, your debt is referred to a private collection agency such as ARO Inc., EOS Canada Inc, Financial Debt Recovery Ltd, or Total Credit Recovery.

Bank Loans

If you default on private student loan payments, your bank or lender may use their in-house collection department, or they may send or sell your account to a third-party collection agency. There is no standard timeframe for when a private loan is sent to collection, but six months is a common benchmark.

Impact on Your Credit Report

Falling behind on student loan payments can have a detrimental effect on your credit report and credit score. Late payments on your student loans will show on your credit report and can lower your credit score. In the case of private student debt, your bank or credit card lender will also report payment arrears to each credit reporting agency.

The Collection Powers of the Government

When government student loans are sent to collection, the consequences are more severe than those of an ordinary debt collector. The Canada Revenue Agency, for instance, has more power to collect on a debt than other creditors.

Unlike a non-government creditor, the CRA does not need to take you to court to freeze your bank account or garnish your wages. They can even garnish 100% of your wages and take amounts from any government benefits or credits you receive.

The CRA also has the authority to keep your income tax refund to apply towards either your Ontario or federal student loan. They can also keep your GST refund. Furthermore, there is no limitation period for federal student loans, meaning the CRA can use its collection tools at any time.

Getting Out of Student Loan Collection

When dealing with student loans in collection, there are a few things to consider. These include repayment assistance, the dischargeability of your student loan, and the impact on your future educational plans.

Repayment Assistance

The federal government offers repayment assistance through the Repayment Assistance Plan (RAP). However, to be eligible, you must be up-to-date on your student loan payments. If your loan is already in arrears and the CRA is contacting you for collection, it may be challenging to bring your monthly payments current.

Dischargeability of Your Student Loan

Filing for bankruptcy or a consumer proposal can give you a fresh start. However, any debt under the Canada Student Loans Act or the Canada Student Financial Assistance Act survives a bankruptcy or proposal if it has been less than seven years since your last end of study date.

Private student loans, on the other hand, can be discharged through bankruptcy or proposal without the seven-year rule. However, if these loans were co-signed and you file for insolvency, your lender will pursue the co-signer for payment.

Future Educational Plans

If you’re currently in school or planning on returning, you should understand how defaulting on your student loans will impact your ability to receive new student loans. Once your government student loans are in collections, you cannot receive further student aid until your loan payments, including outstanding interest, are brought current.

Seeking Help

If your student loans are in collection with the CRA, talk with a Licensed Insolvency Trustee about your options. They can provide you with options that can help you move forward from your debt.

In conclusion, understanding what happens when your student loan is in collection can help you navigate the complexities of the process and make informed decisions about how to manage your debt. Always remember, there are resources available to help you navigate through this challenging time.

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