Did you know it takes the average post-secondary student more than 10 years to repay their student debt?
One in six insolvencies in Canada involved someone looking for student debt forgiveness.
Because after years of struggling, many graduates are no longer able to keep up with their student loan payments. Student loan borrowers who file insolvency still carry an outstanding loan balance of almost $15,000 after years of making payments.
Graduates are finding it difficult to obtain long-term, sustainable positions in their chosen career path that pay enough to keep up with their student loan debt obligations. Add in the fact that many are trying to raise a family, make mortgage payments, and pay off credit card debt, and it’s not surprising that so many seek financial aid to help them repay their student debt.
In this guide to student loan forgiveness, we outline what you need to know about:
- Which student debt relief options only defer payments, and which options result in student loan forgiveness;
- How and when to negotiate new payment arrangements;
- How you can take advantage of government repayment assistance programs to change the term of your loan or apply for repayment assistance;
- How the Bankruptcy & Insolvency Act can eliminate student loan debt;
- How the seven-year rule works in a bankruptcy or consumer proposal.
It takes the average post-secondary student more than 10 years to repay their student debt in full. After years of struggling, you may no longer be able to keep up with your student loan payments. Here are 4 debt relief options to consider. Voluntary renegotiation – contact your student loan lender and negotiate new payments terms you can afford. This is a good option if: you can afford to repay your loans in full and you only need temporary payment relief. Canada Repayment Assistance Plan – this applies only to government guaranteed student loans. Monthly payments may be reduced or eliminated based on income. You must: reside in Canada, be out of school for at least six months, cannot be in default on your student loans. Graduates can obtain full relief from payments while their income is below set income thresholds. This option will not eliminate your student debt. It provides payment relief, not debt relief. Consider bankruptcy. Government guaranteed student debt is eligible for discharge under the Bankruptcy & Insolvency Act if you have been out of school for more than 7 years. The 7-year clock starts from the date you ceased to be a student. This can be shortened to 5 years if you can prove financial hardship. Bankruptcy will also eliminate credit card and other unsecured debts. File consumer proposal. As an alternative to bankruptcy, a consumer proposal will also discharge student debt over 7 years old. Student debt less than 7 years old? Bankruptcy or a proposal may still be a good option…Eliminating other debts can improve your cash flow making student loan repayment easier. Talk with a Licensed Insolvency Trustee. An LIT is qualified to provide you with a range of options to deal with your student debts.
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Government payment relief programs for Canada Student Loans and OSAP
The Government of Canada offers two different repayment programs that provide varying levels of benefit including reduction in your monthly payments, interest relief, payment deferrals, and outright loan forgiveness depending on the severity of your financial situation. OSAP loan forgiveness is integrated with Canada Student Loan programs making application for payment assistance easier for Ontario students. Other provincial student loans are also integrated. Check with your provincial student loan office.
Revision of terms
The standard maximum repayment period for Canada Student Loans is 114 months or 9.5 years. If you are experiencing a temporary reduction in income but can afford to repay your loans in full, you can contact Canada Student Loan office to extend the amortization period up to 174 months or 14.5 years.
How revision of terms works:
Under the Revision of Terms program you can negotiate lower payment terms that work within your budget. If you need more time to pay you can:
- Temporarily extend the term of your loan. This will reduce your monthly payment making it more affordable. At the end of the six-month period, your student loan payments will return to the principal plus interest payments in your original Consolidated Loan Agreement.
- Permanently extend the repayment time to decrease your monthly payments meaning you are paying your loan off over a longer period.
- For a maximum of 12 months during the life of your student loans you can apply to make interest only payments.
Each of these options will mean you pay your student debt in full, with interest. Lengthening the term of your loan, even for a short while, will result in you paying more interest in total on your debt.
Repayment Assistance Plan
If you are struggling to keep up with your student loan payments, you may want to consider payment relief through the Ontario or National Student Loan Repayment Assistance Plan.
Under the RAP program you may receive interest relief or debt reduction (forgiveness), depending on the severity of your financial situation and your income level.
Zero Payment / Complete Payment Deferral Based on Income – the federal government allows for a relief from payments for individuals earning below a certain income threshold. For example, an individual earning less than $25,000 is not required to repay their student debt until their income exceeds this amount.
Repayment Assistance – if your income exceeds the Family Income Thresholds for Zero Payment, you may be eligible for a reduction in your monthly payment.
- During the first 10 years the government provides interest relief by subsidizing the interest costs on your student debt.
- After 10 years, if you still qualify, they may subsidize some of the principal payments as well.
Who qualifies for the RAP program? To be eligible under the Canada Repayment Assistance Program you must reside in Canada, be out of school for at least six months and you cannot already be in default on your student loans. Those with a permanent disability can qualify for consideration of disability-related expenses when determining financial eligibility. It is also important to be aware of various provincial student loan relief programs. In Ontario, OSAP debt is administered through Canada Student Loans so the above apply to graduates needing student debt help. If your loans were issued by PEI or Manitoba you will need to apply through your provincial student financial assistance office.
OSAP and student debt forgiveness under the Bankruptcy & Insolvency Act
Government guaranteed student debt is eligible for discharge and forgiveness under the Bankruptcy & Insolvency Act under certain conditions.
Specifically, bankruptcy law states that:
If you have been “out of school” for more than seven years (often called the seven-year rule) your student loans can be automatically included in a bankruptcy or consumer proposal.
What is the seven-year rule?
The import date to know is the “date you ceased to become a student” or “end of study date”. This is not the same as your loan year or the last year you took out your student loans. It is this date that the government will use to determine eligibility for the discharge of your student debt under the BIA. You can verify your end of study date by calling 1-888-815-4514 for Canada Student Loans or 1-807-343-7260 for Ontario Student Loans.
Financial hardship – the 5 year rule
You can apply to the court to have your student debt discharged in a bankruptcy or proposal as early as five years after your end of study date if you can show that repaying your student loans will cause “undue financial hardship”.
You can be eligible under the hardship provision if you can show the court you acted in good faith in using and repaying those debts is causing, and will continue to cause severe financial difficulty.
There are many court cases discussing the considerations of “good faith”. Talk to your Licensed Insolvency Trustee if you think this is a viable option for you.
Newer student loans
Both a bankruptcy and consumer proposal should still be explored even if your student loans do not meet the seven-year rule if you have significant other unsecured debts like credit card debts. Obtaining a discharge of these debts can make student loan repayment easier.
Private student loan debt forgiveness options
Private loans, from a bank, parent or other financial institution, are repaid directly to your lender. They might include a student line of credit, student credit card or overdraft. Any term revisions must be negotiated with your student loan provider.
Private student loans are just like any other unsecured debt. There are no special rules or study period limitations to qualify for of loan forgiveness. Any credit card debts, lines of credit or bank loans you used to fund the tuition fees and other costs of your education can be discharged in a bankruptcy or proposal with no limitations or waiting period. Read our article for more on repaying private student debt.
Student loan debt advice from a licensed insolvency trustee
Licensed Insolvency Trustees are the only government regulated experts on debt management and the only professional able to eliminate your student debt through a bankruptcy or proposal. An LIT will review your specific situation to determine if you qualify for student relief and what option is best for you.
Discover how we can help you eliminate your student debt. Contact a Hoyes Michalos trustee in your area for a free consultation.