The concept behind student loans is that everybody is supposed to win. Student loans are an investment by the government in you. They lend you money so that you can further your education. You further your education so that you can get a new or better paying job. You have a steady job, you pay back your student loans and you pay your taxes. You are living the Canadian dream. Everybody is happy.
What if it doesn’t turn out that way? What if you graduate and can’t find steady work in your field of study? What if you became ill and couldn’t finish your studies yet you are left with student loans you can’t afford to repay? And if you are like many of our clients, what if cutting back on your living expenses and making a budget just isn’t enough?
We look at what happens if you can’t pay off your student loans and what types of student debt relief are available to you.
It is important to distinguish between student loans and bank loans that finance your studies including student expenses and living costs, as your loan servicer affects the solutions available to you for debt relief.
A government guaranteed student loan is a loan directly from the federal or provincial government to provide financial assistance to students. An example would be your OSAP loans.
A student line of credit or credit card through a bank or other financial institution is not the same as a student loan. These are private student loans you use to fund your education when government loans are not enough to fully pay for school.
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What happens if you don’t pay your student loans?
Not paying your student loans, like any debt, has serious consequences in terms of your credit report and collection actions.
Default & collections
If you don’t make payments for 9 months (270 days) on your Canada Student Loans or related provincial student loans you are in default. Once this happens, your student loans are sent to the Canada Revenue Agency for collection. The CRA has broader collection powers including freezing bank accounts and garnishing wages. If your student debt is in collections, the CRA has the power to withhold your tax refund and apply this towards your student debt.
If you stop making payments on your student credit cards or lines of credit your lender, like any other unsecured creditor, will likely refer your account to a collection agency. You will start to receive collection calls. At some point, they may pursue legal options such as a wage garnishment. If someone has co-signed your loans with the financial institution, then the lender will look to them to pay off the remaining loan balance.
Canada Student Loans does generally report student debt to the credit reporting agencies. If they do, Canada Student Loans appear on your credit report as an installment loan. A student line of credit or credit card appear as revolving credit, because in these types of loans you are only required to make your monthly minimum payments.
Missed or late student loan payments affect your credit score. If your account is in default or collections, this too will be reported to the credit bureau, and will remain on your report for up to six years after the last activity date.
Statute of limitations and student debt
Do student loans ever go away? Unless you qualify and file for formal loan forgiveness through a bankruptcy or proposal, the student debt itself never goes away. Whether collection can be enforced depends on whether your creditor is the federal or provincial government or a private lender. Private student loans are subject to provincial statute of limitations laws. In Ontario, that means if there has been no activity on your student credit card or bank loan for two years, your defense to a lawsuit or wage garnishment action would be that the debt is too old. These same debts would fall off your credit report after six years. You will continue to receive collection calls during this time. Government Student Loans are not subject to a limitation period for collection action. The only way to stop paying government student loans in Canada is to file a bankruptcy or consumer proposal. For example, in Ontario if you owe money to the Ontario Student Assistance Program (OSAP), CRA will continue all possible collection actions until your OSAP loan is discharged through the Bankruptcy & Insolvency Act or paid in full.
What are your options for student debt assistance?
If you are having trouble keeping up with your student loan repayment, you do have options.
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.
Revise your repayment terms
Your first approach can be to negotiate a new repayment schedule for your student loans. You can contact your lender, or Canada Student Loan, to ask them to reduce your monthly payment for a temporary period or permanently lengthen the term of your loan.
Government guaranteed student loans can be repaid over a period of up to 15 years. It is also possible to ask for interest-only payments on Canada Student Loans for a total period of no more than 12 months. With private lenders you can ask for an interest rate reduction. They may or may not grant your request, but it never hurts to ask.
Taking longer to repay your student loans, and lowering your monthly payment, has financial consequences. You will be paying more interest and will pay more over time. This is a good option if you are temporarily out of work and only need a financial break for a short while.
Consolidating student loans is generally not done in Canada. Most lenders will not agree to a consolidation loan to repay government student loans and doing so would eliminate the tax benefit of deducting your student loan interest on your annual tax return.
Explore the government repayment assistance program
If you are struggling to repay your government student loans your next option is to consider government repayment assistance. The government will work with you to some extent if you are having difficulty paying your student loans. The program is called the Repayment Assistance Plan (RAP).
Here’s how it works. You apply to have your financial circumstances assessed. The government decides, based on factors like your income and size of family, how much student loan payment assistance you qualify for.
Under the RAP program you may be able to:
- Obtain payment deferral. If your income is below a certain threshold, you can be eligible for complete deferral of payments. This doesn’t eliminate your student debt, it just means you don’t have to make any payments right now.
- Qualify for interest relief if you earn above the threshold.
- In rare circumstances you can obtain some principal reduction if, after 10 years of interest relief, you still can’t afford your student loan payments.
Your loan must be in good standing to apply under the RAP and you are required to make an application for the RAP.
Note, this is not student debt forgiveness of your student loan debt. You will still be making payments and the relief may only be temporary. Your options for repayment assistance are not the same for private student debt like bank loans. If you have a student line of credit or student credit card, you will need to negotiate directly with the bank or financial institution for a term extension or interest relief.
Consider student loan forgiveness programs like a proposal or bankruptcy
If you are not able to pay your debts by selling or refinancing assets, it might be a good time to talk to a licensed insolvency trustee about options that can eliminate your student loans. Through a trustee you have two loan forgiveness programs to deal with your student debt:
- you can file bankruptcy or
- you can file a consumer proposal.
In a bankruptcy or consumer proposal government guaranteed student loans are subject to something called the 7 year rule before they can be eliminated. You must have been out of school for more than 7 years when your personal bankruptcy or consumer proposal is filed, for your student loans to be automatically eliminated.
This rule does not apply to private student loans. Student lines of credit can be eliminated in a bankruptcy or consumer proposal just like any other unsecured debt. There is NO waiting period. However, if you have a co-signer the bank will pursue them for collection.
Other common questions regarding student loans and options
Can I file insolvency if my student loans are less than 7 years old? Yes. If you have been out of school for less than seven years, you can still file insolvency to deal with other debts like credit card debts, bank loans and payday loans. Eliminating these payments can help make your student debt payments more affordable.
Should I pay OSAP interest or make payments against my student debt during a consumer proposal? You cannot legally be compelled to make OSAP payments on student loans until the consumer proposal or bankruptcy is done. We encourage people to attempt to apply for interest relief or the repayment assistance program with student loans when possible. If you have room in your budget, you can make payments towards the interest while the consumer proposal is active.
Can I file insolvency a second time to take care of student loans once they reach the 7 year limitation? Yes. There are however implications of a second bankruptcy including lengthening the required time you will be bankrupt. A better choice in this case may be to file a consumer proposal to negotiate a reduced amount for your student debt. If, however, Canada Student Loans is your only creditor getting their agreement may require a higher settlement amount. If you have accumulated more debt since your original filing, a second insolvency can deal with that debt as well.
Can I apply for financial hardship before 7 years? Yes. It is possible to make an application to the courts to have your student loans discharged. The idea is that the court reviews your circumstances to determine if your debts should be discharged because of your ongoing financial hardship. The primary criteria are that you have been out of school for 5 years, have filed a bankruptcy or proposal and you can prove extreme financial circumstances that make it an ongoing hardship to repay your student debt. While a trustee can help guide you with this option, you will usually also need the assistant of a lawyer to apply and the criteria for proving financial hardship is quite onerous.
If you can’t pay your student loans, talk with a Licensed Insolvency Trustee for help with student loan repayment reduction. We will explain all your options that can help you get rid of burdensome student loan debt. Book a free consultation today.