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Your student loan, your credit history and you

You’ve got a student loan and so far things are great. The government sends you a cheque every semester and as long as you make sure they know you’re still in school, they don’t charge you interest and they don’t expect any money from you.

But some day not so many years from now, the government is going to want you to start paying them back. You’ll have two choices:

1. You can pay them.

2. You can tell them to get stuffed.

I know the second choice looks really appealing — it’d save you so much money. But as is often the case in this world, the appealing course has some serious ramifications you should be aware of before you make your decision, and that means understanding what credit ratings are and what they’re going to mean for your future.

Some students think that student loans are somehow less real than other loans. Students are expected to be a little irresponsible, aren’t they? You’re having a wild and crazy time at university, right? And when you apply for a car loan a few years after graduation and the bank’s loan officer sees that you defaulted on your student loan, he’s going to chuckle and shake his head and approve the loan anyway, right?

I’m sure you don’t need to be beaten over the head like this. Obviously, what I’m getting at is that student loans are very real, and your ability to mess up your credit history by mismanaging them is equally real. Actually, because of bankruptcy laws, your student loans can have even longer-lasting effects than everyday loans that people take out on cars and homes and eight-piece dinette sets with no money down and no payments until 2012.

Canada has a credit reporting system that is designed to help lenders make informed choices about who they lend their money to. We talked to Odette Auger, Vice President of Operations of Equifax Canada about the credit reporting system and it turns out it all comes down to sharing information.

Whenever a company lends you money, or issues you a credit card or extends credit in some way, they report a credit rating to a pair of credit reporting agencies (they’re called Equifax Canada and TransUnion Canada, and they’ll give you your credit report for a fee over the internet, or for free through the mail). If you always pay on time, you get a good rating, but every time you mess up by paying late or worse, by missing a payment, your credit rating gets worse and worse.

All of these ratings are taken together by the credit reporting agencies and put on your credit report, which is what your banker is looking at when he does a credit check on you. If you have a long history of paying your debts on time, you appear to be a good credit risk and they’ll be more inclined to lend you money and give you a better interest rate. If you have a bad history or if you’ve never borrowed money and have no history at all, you’ll have a much harder time getting a loan. And it doesn’t end at loans: sometimes landlords, insurers and even potential employers require credit checks, and they can be much more difficult to deal with if you have a bad credit history.

Your government lenders report credit ratings just like every other lender. And if you’re like most students, you haven’t taken out many other loans before, so your student loans are going to be one of the only (if not the only) item on your credit report. If you mess this one up, there’s not going to be much else on that report to reassure a bank when you ask for a loan.

Once you have a bad credit history, it’s a long road back. Items on your credit report stay there for seven years. “Nothing gets repaired within a short time — it’s like taking a diet. It takes time, unfortunately,” Auger says.

And what are the longer-lasting effects of student loans? It comes down to a little section of the Bankruptcy and Insolvency Act. Normally, if you’re up to your ears in debts and there’s no chance you can repay them, you can declare bankruptcy and all of your debts and assets just go away and you get to start all over again, except that this time your credit is completely shot from the get-go.

There are a couple of exceptions to the debts that bankruptcy can clear, however, and one of them is federal and provincial student loans. For a period of time — and I’m quoting the act here — section 178 (1)(g) if you don’t believe me — “within seven years after the date on which the bankrupt ceased to be a full- or part-time student” you can’t get rid of student loans through bankruptcy.

That means that for seven years after the last course you take at university, you can declare bankruptcy as many times as you want and your student loans will stick with you through it all, like faithful companions.

Singling out student loans like this might sound unreasonably harsh, but there is some logic behind it. If someone lends you money to buy a house and you don’t repay, they repossess your house. But if someone lends you money to get an education and you don’t pay, what are they going to do, repossess your head?

You get the idea.

So are you scared half to death now? Okay, calm down. Take deep breaths. It’s not that bad — I just wanted to get your attention. Now let’s get to the advice part of this advice column.

It should be easy to avoid defaulting on your loan while you’re still in school, because you’re not required to make any payments — as long as the National Student Loans Service Centre and your provincial government lender know you’re still in school.

When you apply for another student loan, your application will tell them that you’re going to school for another year. But if you don’t get a loan, it’s your responsibility to get your university to send them a confirmation of enrolment. If they don’t get one, they’ll assume you either graduated or dropped out and they’ll start charging interest and six months later they’ll be expecting their first payment, which you probably won’t be ready to make. This can be a disaster for many students, because even if you prove you’re still in school, the student loan program won’t reinstate your interest-free status until you’ve paid them all of the interest you owe them.

After you graduate, and you get your loan consolidation contract, it’s not a bad idea to keep your monthly payment as low as possible, even if you’re eager to clear up your loan as soon as possible. You can always make extra payments if you want to, but keeping your payments low will help keep you out of a bind if you get into a financial pinch.

If you have trouble finding a good job when you graduate, government lenders offer a relief program, called the Repayment Assistance program, which you can read more about here. If you qualify for Repayment Assistance, you’ll never have to pay more than 20 per cent of your family income, the federal government will cover your interest charges so your payments will go directly to your principal, and if your income is low enough, you won’t have to make any payments at all.

The catch is that you have to stay out of default to be eligible for Repayment Assistance. That means that you have to apply for the program before you start missing payments, so stay on top of your loan and get help before you get in trouble.

For an estimate of how much repayment assistance you might be eligible for, see canlearn.ca’s Repayment Assistance Estimator.

Erin Millar and Ben Coli are writing an advice book for university students. Email any questions or comments to straightupguide@gmail.com.

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