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 loan forgiveness.
Because after years of struggling, many graduates are no longer able to keep up with their student loan 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 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 need help with 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
Private Loan or Government Guaranteed Loan?
The debt relief options available for student loans differ depending on whether you have a private loan, or a government guaranteed student loan through the federal government or provincial student loan program.
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 the creditor.
Private student loans are discharged in a bankruptcy or proposal with no limitations or waiting period. Read our article for more on repaying private student debt. Different student loan repayment programs offer varying benefits including reduction in your monthly payments, interest relief, payment deferrals, and outright loan forgiveness.
Here are several alternatives to consider including:
- Voluntary negotiation,
- Government assistance, and
- Debt relief through the Bankruptcy & Insolvency Act.
If you are experiencing a temporary reduction in income but can afford to repay your loans in full, you can contact your student loan lender to negotiate new payment terms that work within your budget.
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 your monthly payments may be reduced or eliminated entirely, depending on the severity of your financial situation and your income level.
Zero Payment Based on Income – the federal government also 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 will subsidize interest costs on the student debt.
- After 10 years, if you still qualify, they may subsidize some of the principal payments as well.
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, student loans are 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.
Debt Forgiveness Under the Bankruptcy & Insolvency Act
Student debt is eligible for discharge 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”. 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.
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.
Student Loan Debt Advice From a Licensed Insolvency Trustee
Did you know that only Licensed Insolvency Trustees are the only government regulated experts on debt management? 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.