Student Debt Contributing To More Insolvencies

Student debt is a looming debt crisis. Today, almost 1 in 7 insolvencies involve student debt. Those who file insolvency with student related debt owe an average of $13,877 in student loans representing 31% of all their unsecured debt. And this is after spending years repaying those loans. According to Canada Student Loans, students typically take between nine and 15 years to pay off their student loans in full. But some don’t get there; they declare insolvency first.  In this report we take a deep look at the profile of the average insolvent student debtor, with data accumulated over the past six years, to explore what’s changed, who is defaulting on their student loans and filing insolvency, and why.

Student debt problems on the rise

The number of insolvencies involving students is on the rise. In 2017, 15.1% of insolvent debtors carried a student loan, up from 12.9% in 2011 when we started tracking student debt data and bankruptcies.

Rising tuition contributing to insolvencies

The average tuition cost for a Canadian university is now $6,500 with in-demand programs costing more than $20,000 per year. According to an Ipsos poll conducted in 2017 three-quarters, or 77% of Canadian graduates under 40 have some regrets about their student debt.

Our own study shows that tuition hikes are taking their toll on recent graduates. Average student loan balances for insolvent debtors aged 18-29 grew by 20% over the past 7 years to $13,168 in 2017 compared to $10,962 in 2011.  Higher debt upon graduation is just not sustainable, contributing to many graduates declaring insolvency much earlier than in the past.

Insolvency Being Declared Much Sooner for Student Debt

Our data shows that graduates are declaring insolvency much earlier. The average age of an insolvent student debtor in 2017 was 35.1 compared to 35.7 in 2011 after peaking at 36.1 years in 2012.

While more likely to be in their 30s, almost 3 in 10 student debt insolvencies are filed by those aged 18-29 and insolvency among recent graduates is increasing.

To have student debt dissolved in a bankruptcy or consumer proposal, the debtor must have been out of school for at least seven years. Students who did not successfully complete their studies can also have their student debt eliminated if their end of study date is more than seven years before they filed their consumer proposal or bankruptcy. Federal and provincial student loan and grant programs such as OSAP have helped increase post-secondary participation levels among young Canadians but have also resulted in high dropout rates.  Historical studies by Statistics Canada report a university dropout rate of 16% and a college dropout rate of 25%. Yet these are people who unfortunately still must repay their accumulated student loans, a challenge when they are unable to find suitable employment.

Job related challenges lead to student debt default

While most student debtors cite poor management of finances as the number one cause of their debt problems, job related reasons have risen dramatically in recent years despite an economic boom in Ontario.

In 2016, our most recent data year for employment information, 60% of insolvent student debtors blamed job loss or income related issues as a primary cause of their insolvency. In 2011, just two years following the 2009 economic crisis, student debtors listed job related causes in only 42% of cases.

Graduates leaving university with hefty student debt often end up working in unpaid internships and minimum wage jobs. They are increasingly unable to find a stable job with an income level sufficient to support both student loan repayment and living expenses, leading to an increase in the percentage of insolvent debtors with student debt.

While the numbers are small, it is also interesting to note the increase in student debtors listing business failure as a cause of their bankruptcy.  This may be an indication of the number of students going into business for themselves when unable to find employment in their field.

Delaying financial obligations and accumulating post-graduate debt

Repaying student debt after graduation takes more than just simple budgeting to pay back this level of loans. The obligation to pay back debt at such an early age creates a cash flow crunch when most are earning a lower than average income. The average household income for an insolvent student debtor in 2017 was $2,812 – 4% below that of the average insolvent debtor.

Individuals struggling to repay student debt are unable to build an emergency fund, save for a home and keep up with student debt payments. Some turn to credit card debt to makes ends meet and a staggering number of insolvent student debtors use payday loans. Today, 37% of student debtors had at least one payday loan at the time of their insolvency, almost double that of the rate in 2011 (19%).

This creates a cycle of debt accumulation post-graduation that contributes to their insolvency.

In 2017, including their student loans, the average insolvent student debtor owed a total of $45,109 in unsecured debt.

It is however still student debt that is their primary problem. Student loans now account for 31% of their total unsecured balances.

Student debt more of a dilemma for women

Even more concerning, overwhelming student debt is primarily a problem for women. In 2017, 63% of student debtors were female, up from 58% in 2011.

The female student debtor is struggling with higher student debt than her male cohort. Jane student debtor owes an average of $14,704 in student debt, 18% more than the average male debtor with student loans. And this has been a trend that has occurred consistently since we began our study.

Surprisingly, women filing insolvency with student debt earned more than their male counterparts in our most recent study year (2017). So why are they filing insolvency?  The answer is two-fold:

  • A woman filing insolvency is less likely to be employed at the time of insolvency. She is much more likely to be out of work for other reasons including maternity leave and child care, affecting her ability to maintain a stable income source. It is this susceptibility to having an intermittent income level that makes it difficult for Jane student debtor to keep up with her student loan repayments. Consequently, she has a higher student debt level, across almost all age groups, than do male student debtors.
  • Women filing insolvency are also much more likely to be single parents than men. While only 5% of men with student debt are single fathers, 34% of women with student debt are single mothers. As a result, she is struggling to balance both child care costs and student loan repayment on a single income.

Are government programs helping?

Recently the government raised the minimum annual income before requiring student debt repayment to $25,000. While this helps alleviate cash flow issues in the early years, for many it is just postponing the inevitable.

The Canada Student Loans Program reported than more than a quarter million, or 276,000 borrowers, received support under the Repayment Assistance Plan in the 2015-2016 loan year – up 7.8% from the year before.  If we extrapolate our insolvency findings to 2017 Canadian insolvencies, we can estimate that more than 18,000 Canadians filed insolvency with approximately $250 million in student loans. In early 2018, the Canadian government reported it wrote off another $203.5 million in student loans it won’t collect from 34,240 students.

The government has instituted a Repayment Assistance Program to help students facing financial hardship with student debt repayment.  If the applicant can prove financial hardship, they are entitled to interest relief under Stage 1 for a period of up to 60 months. After that, if still struggling, they may be entitled to both principal and interest relief. Many insolvent student debtors are either participating in this program or do not qualify under the stringent hardship provisions. For many, the postponement of payments does not help when they are also struggling with other debt. And this is contributing the the increase in student bankruptcies and consumer proposals in Canada.

AVERAGE STUDENT DEBTOR 2017 Update
Personal Information
Male 37%
Female 63%
Average age 35
Marital status
Married or Common-law 33%
Divorced or Separated 13%
Widowed 1%
Single 53%
Average family size 2.2 (including debtor)
Likelihood of having dependent 43%
Average monthly income $2,404 net of deductions
Total unsecured debt $45,019
Unsecured debt-to-income ratio 156%
Likelihood they own a home (2015-16) 8%
Average mortgage value (2015-16) $194,074
Detailed Information on the amount of average unsecured debt:
Personal loans $11,701
Credit cards $9,013
Taxes $4,963
Student loans $13,877
Other $5,465