What is student loan debt?
Student loan debt is a debt that occurs after an individual has taken out a loan to subsidize their education. Students across the world and within Canada rely on student loan companies to pursue their education after secondary school.
Full time and part-time education post-secondary school are extremely expensive so families and individuals cannot fund their children’s education or their own education. Many therefore turn to student loan services in order to pursue a degree.
In Canada, student loans are administered by the Government of Canada, but vary by province, meaning the rules and regulations can change slightly depending on where you are applying. This also means the rules regarding how you pay them back vary slightly from province to province.
Generally, you do not need to start repaying your student loan until six months after you have graduated, giving you a window to establish yourself outside of education and look for a job. However, in the current job market, that is easier said than done. Not everyone can coordinate their debt payments with this strict timeline. Moreover, the additional interest rates that begin to accumulate can be intimidating and stress inducing.
How much is student debt in Canada?
Student debt in Canada amounted to 18.2 billion dollars in 2016-2017 (source) whereas the average Canada student loan was 5,318 $ in the same period.
Although we can estimate the student loan debt in Canada, each case must be handled and assessed on an individual basis, as everyone borrows different amounts, and have differing levels of repayment capabilities.
Can student loans be forgiven in Canada?
Student loans cannot be forgiven in Canada, meaning your debt will likely stick with you and accumulate if you do not have the means to respect your payment obligations. However, there are different debt relief options that you can seek out that will help you in your repayment journey.
Although student loan forgiveness is not readily available in Canada as it is in some other countries, you should continue to monitor the situation. There is currently pressure being put on Trudeau and the federal government to cancel up to $20,000 worth of student debt per person due to the financial pressures that have been experienced during the Covid-19 pandemic (source). However, you should continue to repay what you can of your student loan whilst discussing alternative options with professionals if needed.
Do student loans go away after 7 years in Canada?
Unfortunately, there is no blanket rule that allows student loans to disappear after 7 years in Canada. However, there is a rule in which the 7-year period comes into play, which is what people may be getting confused with.
If you decide that declaring bankruptcy is the best course of action for you, the 7-year period is extremely important. If you declare bankruptcy 7 years or more after you have completely finished your full- or part-time education, your loan will be eligible for dismissal.
Declaring bankruptcy before you have been out of education for 7 years means that you still have to pay off your loan. It is therefore important to consider when is the best time for you to file for bankruptcy if that is what you are planning. Talking to a licensed insolvency trustee will help you to make this decision.
What happens if you never pay your student loans?
It is never recommended to ignore your financial responsibilities as this is going to cause you more problems in the long-term. Since we have already established that Canada does not currently have a student loan forgiveness policy, never paying your student loans is not a viable option.
Not paying your student loan debt can incur an array of penalties, including, but not limited to:
- Increased interest rates
- Ineligibility for future funding
- Poor credit scores
- Being contacted by collection agencies
- Taken to court
Never paying your debt should not be something you should consider. Instead, seek out professional debt help to make managing student loans easier.
Solutions to get out of student loan debt
If you are beginning to feel the stress and pressure of student loan debt, you should look into solutions that will help you control your debt and minimize its long term effects on not only your credit score and financial situation, but also your mental state and future prospects.
Here are a few solutions that you might want to look into:
Repayment assistance plan (RAP)
The repayment assistance plan is a plan offered by the Canadian government alongside your province. You will be eligible for the repayment assistance plan if you are a resident of Canada, have a student loan in good standing and the amount you are capable of paying per month is less than the required payment.
If once your monthly family income is assessed and you fall short of your monthly required repayments, you will be able to claim help from the repayment assistance plan. The plan helps you out by covering all of the interest or the remainder of the interest that you owe, given that you are contributing what you can afford to the principal loan, and if you can, some of the interest.
This initial stage of RAP can continue for 10 years. If after 10 years, you remain incapable of paying off your loan, you can apply for stage two. In stage two, you will continue to pay as much as you can based on an assessment of what you can afford. However, the government and your province will now commit to paying off all of your principal loan and interest that you cannot pay until your loan is cleared.
Revision of terms
Revising the terms of your loan is also an option that many individuals choose to help them pay their student loan debt. As the title suggests, it is a process in which you renegotiate your terms of payment to allow you some leniency on monthly payments.
Under the terms and conditions of a revision of terms, you are able to do a few things. Firstly, you can choose to temporarily decrease your monthly payments. This decreases both your principal loan and your interest rates. Your second option is to extend the amount of time you have to pay back your loans, which will subsequently decrease your monthly payments. Lastly, you can decide to only pay interest on your loan for a short amount of time.
These are all short-term solutions and you should consider their repercussions as although it will fix your current financial issues, in the long term, you will end up paying more interest considering that it will take you a bit longer to pay back your loan.
If 7 years have passed since you left your full- or part-time education, you could consider filing a consumer proposal. A consumer proposal is organized by a licensed insolvency trustee that helps you to renegotiate the debt load you owe creditors.
This is an option that is often considered instead of bankruptcy as it allows you to keep your assets and also protects you from being taken to court by your creditors.
If you are not in a position to reap the benefits of any of the above options, you may want to consider filing for personal bankruptcy. Again, you must have been out of education for at least 7 years to be able to pursue this course of action.
Filing for bankruptcy is sometimes the only option people have. If you are completely unable to make payments on your student loans, have a loan in excess of $1,000 and are unable to make any of your other bills and payments, bankruptcy is a possibility.
Personal bankruptcy clears all your debts but you have to give up your personal assets. Although this can be a scary and daunting prospect, filing for personal bankruptcy will immediately relieve you from all your debt, allowing you to start fresh, so do not dismiss this option straight away!
Need help getting rid of your student debt ?
Although student aid and the temporary financial security offered by student loans is a great tool to allow students to pursue further education, it can also lead to financial stress and debt.
Although loans, especially student loans are taken out with the full intention of paying them back, sometimes there are unforeseen circumstances that make this difficult. Especially in the current financial climate, with the added complications of the Covid-19 pandemic. What must be kept in mind is that you are not the only person experiencing these financial worries, and you should not try to face them alone.
If you are struggling to repay your student loan debts, have outstanding credit card debt, or have any other form of unsecured debt that you are not currently in a position to pay, seek out the help of a professional.
Licensed insolvency trustees at Groupe Serpone will be able to offer you the information and guidance you need to clear your mind and reduce your debt. Our experts can explore different debt relief options with you and help you find the solution that is best adapted to your needs and individual circumstances.