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Student loan debt in Canada is at an all time high, and the demand for student loan debt relief has increased with it. Tuition fees have increased constantly in the last two decades, and young people are taking on expensive loans to complete their education. In 2010, the total amount of student loan debt was $15 billion. But in 2018, Canadian students owed more than $28 billion in government loans.
Every college student owes, on average, $10,172 on graduation. University students owe, on average, $16,727. And every doctoral student owes, on average, $29,000 on graduation. And these debts accumulate interest. The percentage of graduates who owed more than $25,000 grew from 12% in 2000 to over 20% in 2015.
Given the substantial debt students have on graduation, the fact that student debt can have negative consequences in the long run shouldn’t come as a surprise. Just 36% of college and doctorate graduates pay off their student debt in up to three years after they graduate. Most former students pay off their debt in more than 10 years after graduation. And one in six insolvency cases in Canada is filed by someone who is no longer able to make their OSAP payments.
What you need to know about student loans
The Canadian government offers eligible students financial assistance to complete their education through the Canada Student Loans Program. Students can’t apply to loan a specific amount of money. The financial assistance they receive is calculated according to various factors, such as their family’s income, tuition costs, type of degree they pursue, and more.
One of the main advantages of receiving a governmental loan is that you don’t have to pay anything until you graduate. However, students are required to budget their spending, so they shouldn’t spend the entire amount very early in the school year.
One of the main disadvantages of receiving a student loan is that it affects your debt-to-income ratio. Financial institutions take your debt-to-income ratio into account when you want to borrow money, apply for a mortgage, lease a car, etc. If you have too much debt relative to your income, lenders might refuse to service the credit you need to make a large purchase.
What Types Of Student Loans Are Available in Canada?
Students can choose between multiple types of students loans and grants, such as
Federal Student Loans
Federal student loans are some of the most popular options for those who want to complete their academic education. Students can access federal loans at an interest rate of 2.5% plus prime. This means that they will be charged an interest of 2.5% over the average bank prime rate in Canada, which often fluctuates, but is now at 2.45%. Repayments on federal loans start six months after the borrower finishes school.
Provincial Student Loans
Even though most students apply for federal loans, they can also access additional funds through provincial student loans. Each province or territory runs its own financial aid programs for students, so the interest rates and repayment policies differ from one province to another. You can find out more about the services available in each province and territory by visiting the National Student Loans Service Centre website.
Sometimes, students may want to secure privatized funding for their education. They can do this through bank loans or alternative lenders. Private loans usually have higher interest rates than federal or provincial loans, but they’re also easier to access.
Lines of credit are the most popular private student financial assistance product. Most Canadian banks offer lines of credit that are specially designed for students, with interest rates that are close to the prime rate and grace periods after graduation.
How Does Interest Work On Student Loans?
Students sign promissory notes explaining the terms of the student loans, acknowledging that they understand how much they will owe and how they will repay the money. But some students don’t fully understand how interest works on student loans.
The Canadian government subsidizes the financial aid offered to students. This means that the government covers the interest rate while the student is in school, so the balance of the student loan doesn’t grow. But once the student graduates, the government assistance disappears and the interest payments become the student’s responsibility.
On the other hand, unsubsidized loans may charge interest from the day the student takes on the loan. And since the student is not required to make any payments until they graduate, the interest rate builds up and increases the loan balance from the moment the loan is accepted until graduation.
What are the repercussions of student loans?
- Significantly increases your debt-to-income ratio – This can affect your credit score, making it difficult to qualify for mortgages, car leases, or other types of financial loans. According to a study by Equifax, 55.7% of millennial renters listed student loan debt as the top reason for not owning a home.
- Can affect your ability to move out – 42.1% of young adults in Ontario lived with their parents in 2017, an increase of 20.3% since 2001. Most experts agree that this figure is still on the rise. And many of those young adults say that their student loan debt affects their ability to move out.
- Limits your ability to pursue your dreams – Student loan debt can limit your ability to pursue your dreams. You may find yourself sacrificing an entry position in a field you’re interested in for a better paid opportunity in an unrelated field just to meet your financial obligations.
- May restrict your chances of being hired in the financial industry – Companies operating in the financial industry conduct credit checks on job applicants. Having a student loan that lowers your credit score may reduce your chances of landing the job.
Student Loan Repayment Plans
You can use the Canada student repayment calculator to estimate how much it would cost to repay your student loan debt.
If you find that you’re unable to make your student loan payments, you can ask your provincial or territorial government and the Government of Canada to help you repay it through the Repayment Assistance Plan (RAP) or the Repayment Assistance Plan for Borrowers with a Permanent Disability (RAP-PD).
You can apply for RAP anytime. If you’re eligible, the local and federal governments will take it upon themselves to repay the interest owing that’s not covered by your revised payment. The governments will start covering the principal and interest that exceeds your monthly payments only after 60 months of RAP or 10 years after you finish school.
In Ontario, the Ontario Student Assistance Program (OSAP) offers students financial assistance in the form of grants and loans. Students do not have to repay grants, but they have to repay their loans.
Students have a 6-month interest-free grace period after leaving or graduating school before they have to start repaying their OSAP loan.
The Ontario and federal governments can help borrowers repay their student loans if the borrowers can demonstrate their financial need. Eligibility is usually evaluated using gross family income, financial assets, and monthly student loan payment.
What To Do If You Need Student Loan Debt Relief
Student Loan Default & Rehabilitation
If you don’t make a payment toward your student loan debt for over 270 days, your student loans may go into default, which means that they transfer from a student loan servicing company to a collection agency.
Defaulting on your student loan has severe consequences, such as ruining your credit score, tax refund offsets, wage garnishments, and even Social Security garnishments.
The collection agency will try to recuperate some of the debt. Keep in mind that you have rights when this happens:
- The collection agency cannot call you early in the morning, late at night, and cannot call you repeatedly or continuously.
- A debt collector cannot call you when you’re at work if you say so
- The collection agency has to send you written notice of the debt
- They cannot inform family members, friends, or coworkers about your debt.
- They have to honor your request to stop contacting you
- They have to verify all disputed debts
If you believe that any of your rights has been violated, you should consult with a lawyer to validate your case.
You can take your student loan out of default with student loan rehabilitation. First, you have to track down your defaulted loans and contact the collection agency that is in charge of your loan and tell them that you want to apply for a Student Loan Rehabilitation Program.
If you’re eligible, the agency will send you an application package that includes
- The schedule for your monthly rehabilitation payments
- The rehabilitation period end date
- Information on when to return the application package by
To complete the rehabilitation process, you either have to pay the entire owed amount early or respect the provided payment schedule.
If you don’t make your required rehabilitation payments by the end date or if you miss your payments for two months in a row, your rehabilitation process is considered unsuccessful.
Student Loan Forgiveness
Student loan forgiveness is a complex topic, so we talk about it at length in another article. Learn more about student loan forgiveness in Canada.
Frequently Asked Questions About Student Loan Debt
Who should I be working with to resolve my student loan debts?
Contact Remolino & Associates for a free, confidential, no obligation consultation. One of our Licensed Insolvency Trustees will review your financial situation and help you find the best solution for your student loan debts.
How can I qualify for debt relief?
According to the Bankruptcy And Insolvency Act (BIA), filing a Consumer Proposal or Bankruptcy allows you to discharge your student loans. However, government-guaranteed student debt is eligible for discharge only under certain conditions.
Do I still qualify for student debt relief options if I am not up to date with my payments?
If you’re not up to date with your student loan payments, you may qualify for a Student Loan Rehabilitation Program.
Do part time & full time students qualify for a repayment arrangement?
Both part time and full time students may qualify for certain repayment arrangements.
Will I be charged interest?
Your student loan debt will accumulate interest until you pay it off.
How do these programs affect my credit score?
Any program that helps you pay off your debt helps improve your credit score.
How Does Filing a Consumer Proposal or Bankruptcy Affect Your Student Loan Debts?
Your student debt may be discharged if you file a proposal or bankruptcy at least seven years after you ceased being a student. This is not the date when you took out your student loan, so you shouldn’t confuse the two.
However, the court may agree to discharge your student loan debt after only five years after you ended your studies if you can demonstrate that paying your student loan causes you “undue financial hardship”.
You may be eligible for the hardship provision if you can demonstrate that, after trying to pay off your debts “in good faith”, you cannot do so because they cause you severe financial difficulties.
You should consult with a Licensed Insolvency Trustee to see if you may be eligible for this provision or if you’re looking for student loan debt help.