What Can I Do If I Can’t Pay My Student Loans?

Posted in Personal Bankruptcy
Posted by Ian Martin, CPA, CA, CIRP - LIT

student-debt-relief
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 repay 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 weren’t able to finish your studies?

One way or another, what happens if you are unable to repay your student loans? What types of student debt relief are available to you?

Dealing with Government Guaranteed Student Loans

It is important to distinguish between student loans and bank loans that finance your studies and student expenses.

A student loan is a loan directly from the federal or provincial government to provide financial assistance to students.  You can read more about the Canada Student Loans Program here.

A student line of credit through a bank is not the same as a student loan.  Many banks offer these lines of credit and will normally require a co-signer.  They are an alternative if you are not eligible for government student loans or they don’t provide enough financially to fully pay for school.

The repayment options available to you differ depending on whether your loan is a government guaranteed student debt or private student debt. We’ll explain options for both types of student loans in this post.

Government Repayment Assistance Programs

If you are struggling to repay your government student loans your first option is to consider government repayment assistance.

The government is able to 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.  Essentially, 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.

Your loan has to be in good standing to apply under the RAP.  Keep in mind that you are required to make an application for the RAP. Generally 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 are still unable to financially to keep up with your student debt.

However 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.

What If I Am Still Unable To Pay? Considering Bankruptcy Options.

Even with assistance from the government, many people are unable to pay their student loans.  They may not be earning enough, they may have too many other debts. What then?

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.

Through a licensed insolvency trustee you have two bankruptcy options 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. We’ll talk more about that later.

The role of a trustee is to assess a person’s financial circumstances.  The trustee provides information about the merits and consequences of the different debt relief options for resolving a person’s debts, when that person is unable to pay their debts in full.  Those options include filing a consumer proposal or personal bankruptcy.

Filing a bankruptcy or consumer proposal is asking for legal permission to be released from your debts when there is no reasonable expectation of being able to pay them in full.  However, as mentioned earlier there are certain limitations as to whether or not student debt will be eliminated in a bankruptcy or consumer proposal.  These limitations are specified by the Bankruptcy and Insolvency Act.

What are the consequences of this rule? Here it is in a nutshell:

If you have not been out of school for more than 7 years when your personal bankruptcy or consumer proposal is filed, you will still be responsible for repaying your student loans.

What does that really mean?  That depends on your particular circumstances.

Even if the limitation does apply to you and your student debt can’t be included in a bankruptcy or proposal, there may still be reasons to file a consumer proposal or personal bankruptcy.  You may have significant other debts.  Maybe there is a garnishee on your wages.

We talked earlier about how private student loans and government student debt are not the same.  This holds true in a bankruptcy or consumer proposal as well.

If you are unable to pay a private student line of credit, the bank has the right to collect from you or the co-signer.  It is the same as any other debt with a bank. Student lines of credit can be eliminated in a bankruptcy or consumer proposal just like any other debt like credit card debts. There is NO waiting period.  However if you have a co-signer the bank will pursue them for collection.

A financial institution may also offer you a student credit card while you are a student and you may use this to pay for tuition, books, and living expenses. Debts accumulated against a student credit card are included in a bankruptcy or consumer proposal with no legislated limitations.

Making Student Debt Payments Affordable

Consider this: even if your student loans will not be taken care of by a consumer proposal or personal bankruptcy, you cannot be legally compelled to make payments on the student loans until the consumer proposal or bankruptcy is done.

Once your bankruptcy or consumer proposal is completed your other debts are eliminated. Now you are not making payments against those debts, and your bankruptcy and proposal payments are completed. You may now be able to put those amounts toward the student loans making it easier to repay the remaining student debt.

Filing Insolvency A Second Time

What if that kind of plan does not work?  You completed your first consumer proposal or personal bankruptcy when your student loans were less than 7 years old. However for various reasons you now find that you are still unable to repay your student loans.  What options do you have?

One choice would be to file a second bankruptcy.  This is probably not a great choice if the only debt is the student loans.  Here are some of the implications of a second bankruptcy:

  • The shortest period of time to be discharged from a second bankruptcy is 24 months.  For a first time, it is only 9 months;
  • If you have surplus income, the discharge period is 36 months;
  • A second bankruptcy will show on your credit report for 14 years after you are discharged;
  • There is an increased chance that there will be an opposition to your discharge.

Another choice would be to file a consumer proposal.  This is definitely a possibility, but it depends on your ability to offer a proposal that your creditors find attractive.  A consumer proposal will likely involve a monthly payment plan over 3 to 5 years.  If you have been unable to negotiate a reasonable repayment of your student loans on your own, it may be difficult to find a monthly payment in a consumer proposal that your creditors will accept and that you can afford.

Applying For Financial Hardship Before 7 Years

At this stage it may be 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 and that you have been bankrupt or filed a consumer proposal. While a trustee can help guide you with this option, you will usually also need the assistant of a lawyer to apply.

Choosing the Best Approach

As you can see, the options available to you to deal with student debt can vary based on the type of student loan you have, how long you have been out of school and your financial situation. A licensed insolvency trustee like those at Hoyes Michalos can talk to you about how this process works and what option is best for you.

Student Loan Debt Relief Options