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If you can’t Pay Back your Student Loan Debt

A lot of students need to get student loans in order to help them pay for school and the associated expenses. In fact, a CIBC survey stated that about 51% of Canadian students borrow money in order to pay for tuition, books and living expenses. Average Canadian student debt estimates hover in the mid- to high-$20,000 range. The Canadian Federation of Students pegs it at $27,000, which is close to the nearly $26,300 many students said they expected to owe after graduation in a recent BMO survey.

These numbers show that many students have high levels of student debt and that this debt is not only difficult to repay, but it is also causing people to delay life milestones such as purchasing a home, getting married or starting a family.

Though the default rate on student loans dropped to an all-time low in 2012, Social Development Canada expects the rising debt figures may cause it to increase again. Over the past few years, about 14 per cent of people with federal student loans have defaulted within three years of leaving school, according to the CIBC Centre for Human Capital and Productivity at Western University.

So what happens if you’re not able to pay back your student loans?

For the federal portion of loans, a default occurs if you miss mine months (270 days) of payments. For the provincial portion, the amount of time you have differs among the provinces; some only give five months (150 days).  If you default on the federal portion of your student loan, your loan will then be sent to the Canada Revenue Agency (CRA) for collection. If this happens, you will be prohibited from receiving any further student assistance.  If you default on the provincial portion, a private collection agency may handle collection; each province establishes its own rules on handing defaulted loans. In Ontario, Ministry of Finance acts as collection agency for Ontario portion.

Under such circumstances, you may have following options:

  • Rehabilitation for Canadian Student Loans

Contact the National Student Loan Service Centre (NSLSC) and discuss your situation. If you have provincial student loans, you will need to contact the loan provider in your province. For provincial loans, the process will be different than the one described below.

When you contact the NSLSC, in order to rehabilitate your student loans, you will need to:

  • Arrange a payment schedule with the CRA
  • Repay any interest that is owed on your loans
  • Make a lump sum payment that is equivalent to two monthly payments on your loan

Once this is completed, you will need to speak with a Canada Student Loans Payment client relations officer to discuss rehabilitating your loan

  • Debt Repayment Assistance

Students can try Repayment Assistance Plan (RAP)  if they are struggling with the student loan payments.

The government’s Repayment Assistance Plan is designed to make it easier for people to manage their student loans. Under this plan, loan payments are reduced (or even eliminated) depending on a person’s financial situation.

You need to apply for the RAP as enrollment is not automatic. In addition, you’ll need to reapply every six months.

The Government of Canada and the provincial government of the applicant will pay the interest owing that is not covered by the revised payments. This will last for up to 60 months or until you are 10 years out of school, whichever comes first.  After this point, the federal and provincial governments will start to cover the principle as well so that the loan is paid off completely within 15 years of a person finishing school or within 10 years if you have a permanent disability.

  • Bankruptcy and Consumer Proposal

If you are having financial difficulties and are unable to repay your student loans, you may  wish to consider speaking with a licensed trustee in bankruptcy. It’s important to note that speaking with a trustee doesn’t automatically mean that you will end up filing for bankruptcy.

You can only include student loans in these legal processes if you have been out of school for at least seven years.

However, if you have not been out of school for the required seven years but you have additional debts  such as a line of credit or credit card debt, you may wish to consider filing  for bankruptcy or Consumer  Proposal for these debts alone. Once they are eliminated it will be much easier for you to start meeting your obligations on your student loans.

Also, Under the Bankruptcy & Insolvency Act, there is provision for you to apply to have your student loans included in either your bankruptcy or consumer proposal if you have ceased to be a student for five years instead of seven if you prove to the court that you have acted in good faith in taking out and attempting to repay your student loans and you would experience hardship if you had to wait further two year.

A trustee can review your financial information, including the details of your student loans, and provide you with details on the debt relief options that are available to you, even if these options are not administered by the trustee.