More young Canadians are getting into trouble repaying their student debt than ever before. A study by Hoyes Michalos found that almost 1 in 5 insolvencies involve student loan debt, and this number is rising. This is not surprising when average tuition in Canada is $6,838 per year for undergraduates and $7,086 for a graduate degree. Combine this with a sketchy job market, and this creates a disaster for student loan repayment.
Statistics Canada’s actuarial report regarding student loan write-offs assumes a net default rate of 9% on consolidated federal and provincial student loans. However, this masks just how many students struggle with payments. From their report, almost 15% of student loans go into default. Some of these are, in their words rehabilitated, through the Repayment Assistance Plan.
But what happens if you don’t qualify for Repayment Assistance or if you’ve tried and are still struggling to repay your student loan debt? What are your options for student loan debt consolidation that can help relieve the financial stress?
Here are the advantages and disadvantages of different debt consolidation programs for student debt.
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Student Loan Debt Consolidation Options
Debt consolidation allows you to combine two or more debts into one. The advantage of debt consolidation is that you lower your interest costs and have the convenience of making only one hopefully lower, monthly payment.
Besides a mortgage, student debt may be the largest loan many Canadians take out in their lifetime. If you fully financed your education, you might graduate with more than $60,000 in student debt. I’m Doug Hoyes, a licensed insolvency trustee with Hoyes Michalos and Associates. Let’s discuss the consequences of consolidating student debt in Canada. To fund your education, you likely took on some government student loans, and you may have also qualified for a credit card or a student line of credit so you could borrow through a bank or credit union.
If you’re struggling with these payments, can consolidating your student loans help you get a lower interest rate or lower your monthly payments? In Canada, generally, the answer is no. And here’s why. To consolidate, you’ll have to approach a private lender like your bank. They’ll have to agree to take on your Canada student loans, which currently are guaranteed by the government.
Most lenders won’t take over government student loans. Even if they did, your interest rate would likely be higher. Or you’d have to offer security like a home or a vehicle. The main reason not to consolidate Canada student loans with a private lender is you’ll lose the ability to deduct your student loan interest on your taxes. You may lower your monthly payment by stretching out the payments, but you’ll pay more in both interest and taxes, which doesn’t make good financial sense.
So, what do you do if you can’t keep up with your current payments? First, contact Canada Student Loans about repayment assistance. You might be able to lower your payments for a while and may even qualify for a payment deferral. If you’ve been out of school for seven years and are still struggling with the payments, talk with a licensed insolvency trustee about a bankruptcy or consumer proposal. Canada Student Loans can be eliminated through a proposal or bankruptcy as long as you’ve been out of school for more than seven years.
If you want to learn more, click on the link in the description or visit Hoyes dot com and search for student debt.
However, student loan debt consolidation comes with some complications that affect your consolidation options. The first issue is what type of student loan debt you carry. Are you looking for help repaying federal and provincial student loans or are you also struggling with private bank loans, credit cards or lines of credit? The second complication is that certain programs have special rules when it comes to consolidating student loan debt.
Debt Consolidation Loans
A debt consolidation loan involves taking out a new loan from a bank, credit union or financing company to pay off your existing student debts. When consolidating any debt with another lender, you want to make sure you benefit by obtaining a lower interest rate.
For most people struggling with student debt getting a new consolidation loan is not the right option because:
- You must have a good credit rating to qualify for a debt consolidation loan.
- You may be required to pledge assets as collateral, and most student debtors we help do not have any assets to guarantee the loan.
- You lose tax deductions. Interest on your student loan debt is tax deductible. Transferring government student loans to a private lender means you lose this tax benefit.
- Most banks and lending companies will not loan you money to consolidate government guaranteed student loans.
- While you can consolidate student credit card debt and lines of credit into a new loan, if you have poor credit, the interest rate charged may be more than you can afford.
Debt Management Plan or Debt Consolidation Program
Credit counselling agencies offer a program called a Debt Management Plan, or sometimes referred to as a Debt Consolidation Program. This is an arrangement you make where the credit counselling agency works with you to collect the full amount you owe on behalf of the banks.
A debt consolidation program through a credit counsellor does not work for all debts.
A debt consolidation program is not generally a good option for student loan debt because:
- Generally, the government will not deal with credit counsellors. DMPs work okay for credit cards, but CRA, student loans, etc. cannot be dealt with through an informal consolidation program.
- If your government student loans are in collections, you should first investigate the governments Repayment Assistance Program.
- If you have tried and failed with the RAP program, then you may need more relief that a DCP or DMP can offer.
- A debt consolidation program can help consolidate small credit card debts, some outstanding bill payments, and a small bank loan. Know however that this will require you to repay 100% of those debts.
- Many student debtors we help also have payday loans. A DCP does not deal with payday loan debt.
If your other unsecured debts are large, then you may be better off financially looking at a consumer proposal as this can deal with both these debts and in some cases your student loan debt as well.
Consumer Proposal Program
A consumer proposal program is also a debt consolidation program because you make an offer to all your creditors to repay a portion of what you owe and make one monthly payment to your trustee, who then distributes your payments among all your creditors.
The advantage of a consumer proposal is that you also obtain debt relief. You repay less than you owe.
Consumer proposals are effective in dealing with credit card debts, payday loans, bank loans and, in certain circumstances, student loan debt.
For your student debt to be automatically eliminated through a consumer proposal, you must have been out of school for 7 years. Even if your student loan debt does not meet the 7-year limitation, consolidating and settling other unsecured debt through a consumer proposal can make paying back your student loan debt much easier.
Review all your options
Many people are surprised to learn that both a consumer proposal and debt management plan have the exact same impact on your credit report. That means that the difference between these two consolidation options for student debt comes down to a financial choice about how much you can afford to repay.
To explore all your options, contact one of our local Licensed Insolvency Trustees for a free, no-obligation consultation.