Who collects student loans & when will they go into collection?

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In Canada, there are government and private student loans.

• Government loans can be federal, provincial or a combination of both. For example, in Ontario, you can have three types of government loans Canada-Ontario Integrated Student Loans, Canada Student Loans or Ontario Student Loans (OSAP).
• Private student loans are generally issued by banks in the form of student lines of credit or student credit cards.

Canada student loans

Your Canada student loan debt is sent to the Canada Revenue Agency (CRA) for collection when you miss nine months of payments. The CRA has expansive collection powers they can use to collect outstanding student debt, including withholding your tax refund, GST credit and more. I’ll explain more about CRA’s rights to collect later in this article.

OSAP loans

Unpaid OSAP debt is sent to a private collection agency you have missed making the required payments for 270 days. The collection agencies typically used by OSAP are ARO Inc., EOS Canada Inc, Financial Debt Recovery Ltd, or Total Credit Recovery.

Bank loans

If you default on private student loan payments, your bank or lender may use their in-house collection department, or they may send or sell your account to a third-party collection agency. Although six months is a general guideline, there is no set rule for when a private loan is sent to collection.

Your bank or other financial institution has no more rights to collect on a student line of credit than they do any other unsecured loan like a bank loan or overdraft, for example. However, it is common for private student loans to be co-signed. If your parents or anyone co-signed your student line of credit, the bank would look to them to make the payments if you are in arrears.

Monies owing to your university or college

You may also owe tuition, fees, residence charges or other costs directly to your university or college. Your school is an unsecured creditor, much like your bank or credit card company. If you owe money, they can also send your debt to a debt collector. However, universities and colleges can also withhold the issuance of your degree until all tuition, fees and outstanding interest have been paid.

Will my student loan arrears show on my credit report?

In short, yes. Late payments on your student loans will show on your credit report and can affect your credit score.

Canada Student Loans does report late payments on federal student loans to the major credit bureaus. In the case of private student debt, your bank or credit card lender will also report payment arrears to each credit reporting agency.

Late payments lower your credit score and remain on your credit report for six years. Eventually, the account may be marked as ‘in collection,’ which severely harms your credit rating.

Filing a bankruptcy or consumer proposal freezes late payments at the date of filing. However, Canada Student Loans often continues to report late payments during your proceeding. Once you receive your discharge or certificate of completion, you can contact the credit bureaus to erase all of the ‘late payments’ after your original signup date. Fixing this error will help your credit score by ensuring your credit history is accurate and allow these late payments to be purged six years from the date you filed insolvency. Your bankruptcy or proposal would be removed based on those retention periods.

What powers does the government use for student loan collections?

Having your government student loans sent to collection has consequences beyond what an ordinary debt collector can do to collect. This is because the Canada Revenue Agency has more power to collect on a debt than other creditors.

A non-government creditor must take you to court and obtain a judgement before they can garnish your wages or freeze your bank account. A garnishment order by a private lender is restricted to 20% of your wages.

CRA does not need to go to court to freeze your bank account or garnish your wages. They are also able to garnish 100% of your wages. CRA has the authority to take amounts from any government benefits or credits you receive even if you have a payment arrangement with them and are making payments.

CRA will keep your income tax refund to apply towards either your Ontario or federal student loan. It will also typically keep your GST refund.

Additionally, there is no limitation period for federal student loans. While ordinary unsecured creditors must pursue legal action within a specific time limit (2 years in Ontario), CRA can use its collection tools at any time.

The only way to stop CRA collection actions is to file a bankruptcy or consumer proposal.

How to get your student loan out of collection

When it comes to dealing with student loans in collection, there are a few things to consider.

Repayment assistance

The only payment assistance available through the federal government is through the Repayment Assistance Plan (RAP).  To be eligible for help under the Canada student loan rehabilitation program, you must be up-to-date on your student loan payments. However, if you have a defaulted loan that is already nine months in arrears and CRA is contacting you for collection, it is unlikely you can afford to bring your monthly payments current.

In that case, your next alternative to stop CRA actions is to talk with a Licensed Insolvency Trustee.

Is your student loan dischargeable?

Filing a bankruptcy or consumer proposal can be the right choice for a fresh start. Once you file, you will be under what is called a “stay of proceedings“. This stay provides you with automatic legal protection from creditor actions, including the actions of the CRA.

To know if your student debt can be discharged in a consumer proposal or bankruptcy, you must confirm your end of study date with both the Canada and provincial student loan departments. The Bankruptcy and Insolvency Act states that any debt under the Canada Student Loans Act or the Canada Student Financial Assistance Act survives a bankruptcy or proposal if it has been less than seven years since your last end of study date. The date you received any loan is not the deciding factor in what happens to your student loans after seven years.

For private student loans, the seven-year rule does not apply. Unsecured loans you took out with a private lender to pay for school can be automatically discharged through a bankruptcy or proposal. However, if these loans were co-signed and you file insolvency, your lender will pursue the co-signer for payment.

If your student loan debt survives your insolvency proceeding, talk with your trustee about the possibility of making payments to student loans during your filing. The stay of proceedings means you do not have to make payments, but it may make sense to at least make interest-only payments. You will need a letter from your trustee authorizing you to make voluntary payments.

Under the Bankruptcy and Insolvency Act, you can apply to the court to have your student loan debt discharged after five years. However, it is up to the judge to decide if it will make such a court order, and you must be able to prove financial hardship. This application is generally made with the help of a lawyer so you will need to consider the cost.

Are you in or planning on returning to school?

If you are currently in school or planning on returning, it is important to understand how defaulting on your student loans will impact your ability to receive new student loans.

Once your government student loans are in collections, you cannot receive further student aid until your loan payments, including outstanding interest, are brought current.

If you file a bankruptcy or consumer proposal to deal with government student loans, you cannot receive a new student loan until three years after your discharge or completion.

If you are in school or expect to return and need additional student loans, talk with both NCSL and your trustee before filing about the full implications of filing insolvency to deal with student loan debt.

Getting help

If you have student loans in collection with CRA, talk with a Licensed Insolvency Trustee about your options. We will look at how long you have been out of school, whether you have other debts that may prevent you from paying back your student loans and provide you with options that can help you move forward from your debt.

The post What Happens When Your Student Loan Is In Collection? appeared first on Hoyes, Michalos & Associates Inc..

Statistics Canada’s actuarial report regarding student loan write-offs assumes a net default rate of 9% on consolidated federal and provincial student loans. However, this masks just how many students struggle with payments.  From their report, almost 15% of student loans go into default. Some of these are, in their words rehabilitated, through the Repayment Assistance Plan.

But what happens if you don’t qualify for Repayment Assistance or if you’ve tried and are still struggling to repay your student loan debt? What are your options for student loan debt consolidation that can help relieve the financial stress?

Here are the advantages and disadvantages of different debt consolidation programs for student debt.

Student Loan Debt Consolidation Options

Debt consolidation allows you to combine two or more debts into one. The advantage of debt consolidation is that you lower your interest costs and have the convenience of making only one hopefully lower, monthly payment.

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However, student loan debt consolidation comes with some complications that affect your consolidation options. The first issue is what type of student loan debt you carry. Are you looking for help repaying federal and provincial student loans or are you also struggling with private bank loans, credit cards or lines of credit? The second complication is that certain programs have special rules when it comes to consolidating student loan debt.

Debt Consolidation Loans

A debt consolidation loan involves taking out a new loan from a bank, credit union or financing company to pay off your existing student debts.  When consolidating any debt with another lender, you want to make sure you benefit by obtaining a lower interest rate. 

For most people struggling with student debt getting a new consolidation loan is not the right option because:

• You must have a good credit rating to qualify for a debt consolidation loan.
• You may be required to pledge assets as collateral, and most student debtors we help do not have any assets to guarantee the loan.
• You lose tax deductions. Interest on your student loan debt is tax deductible. Transferring government student loans to a private lender means you lose this tax benefit.
• Most banks and lending companies will not loan you money to consolidate government guaranteed student loans.
• While you can consolidate student credit card debt and lines of credit into a new loan, if you have poor credit, the interest rate charged may be more than you can afford.

Debt Management Plan or Debt Consolidation Program

Credit counselling agencies offer a program called a Debt Management Plan, or sometimes referred to as a Debt Consolidation Program. This is an arrangement you make where the credit counselling agency works with you to collect the full amount you owe on behalf of the banks. 

A debt consolidation program through a credit counsellor does not work for all debts.

A debt consolidation program is not generally a good option for student loan debt because:

• Generally, the government will not deal with credit counsellors. DMPs work okay for credit cards, but CRA, student loans, etc. cannot be dealt with through an informal consolidation program.
• If your government student loans are in collections, you should first investigate the governments Repayment Assistance Program.
• If you have tried and failed with the RAP program, then you may need more relief that a DCP or DMP can offer.
• A debt consolidation program can help consolidate small credit card debts, some outstanding bill payments, and a small bank loan. Know however that this will require you to repay 100% of those debts.
• Many student debtors we help also have payday loans. A DCP does not deal with payday loan debt.

If your other unsecured debts are large, then you may be better off financially looking at a consumer proposal as this can deal with both these debts and in some cases your student loan debt as well.

Consumer Proposal Program

A consumer proposal program is also a debt consolidation program because you make an offer to all your creditors to repay a portion of what you owe and make one monthly payment to your trustee, who then distributes your payments among all your creditors.

The advantage of a consumer proposal is that you also obtain debt relief. You repay less than you owe. 

Consumer proposals are effective in dealing with credit card debts, payday loans, bank loans and, in certain circumstances, student loan debt.

For your student debt to be automatically eliminated through a consumer proposal, you must have been out of school for 7 years. Even if your student loan debt does not meet the 7-year limitation, consolidating and settling other unsecured debt through a consumer proposal can make paying back your student loan debt much easier.

Review all your options

Many people are surprised to learn that both a consumer proposal and debt management plan have the exact same impact on your credit report. That means that the difference between these two consolidation options for student debt comes down to a financial choice about how much you can afford to repay.

To explore all your options, contact one of our local Licensed Insolvency Trustees for a free, no-obligation consultation. 

The post How Can I Consolidate My Student Debt? appeared first on Hoyes, Michalos & Associates Inc..

One in six insolvencies in Canada involved someone looking for student debt forgiveness.

Why?

Because after years of struggling, many graduates are no longer able to keep up with their student loan payments. Student loan borrowers who file insolvency still carry an outstanding loan balance of almost $15,000 after years of making payments.

Graduates are finding it difficult to obtain long-term, sustainable positions in their chosen career path that pay enough to keep up with their student loan debt obligations. Add in the fact that many are trying to raise a family, make mortgage payments, and pay off credit card debt, and it’s not surprising that so many seek financial aid to help them repay their student debt.

In this guide to student loan forgiveness, we outline what you need to know about:

• Which student debt relief options only defer payments, and which options result in student loan forgiveness;
• How and when to negotiate new payment arrangements;
• How you can take advantage of government repayment assistance programs to change the term of your loan or apply for repayment assistance;
• How the Bankruptcy & Insolvency Act can eliminate student loan debt;
• How the seven-year rule works in a bankruptcy or consumer proposal.

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Government payment relief programs for Canada Student Loans and OSAP

The Government of Canada offers two different repayment programs that provide varying levels of benefit including reduction in your monthly payments, interest relief, payment deferrals, and outright loan forgiveness depending on the severity of your financial situation. OSAP loan forgiveness is integrated with Canada Student Loan programs making application for payment assistance easier for Ontario students. Other provincial student loans are also integrated. Check with your provincial student loan office.

Revision of terms

The standard maximum repayment period for Canada Student Loans is 114 months or 9.5 years. If you are experiencing a temporary reduction in income but can afford to repay your loans in full, you can contact Canada Student Loan office to extend the amortization period up to 174 months or 14.5 years.

How revision of terms works:

Under the Revision of Terms program you can negotiate lower payment terms that work within your budget. If you need more time to pay you can:

• Temporarily extend the term of your loan. This will reduce your monthly payment making it more affordable. At the end of the six-month period, your student loan payments will return to the principal plus interest payments in your original Consolidated Loan Agreement.
• Permanently extend the repayment time to decrease your monthly payments meaning you are paying your loan off over a longer period.
• For a maximum of 12 months during the life of your student loans you can apply to make interest only payments.

Each of these options will mean you pay your student debt in full, with interest. Lengthening the term of your loan, even for a short while, will result in you paying more interest in total on your debt.

Repayment Assistance Plan

If you are struggling to keep up with your student loan payments, you may want to consider payment relief through the Ontario or National Student Loan Repayment Assistance Plan. 

Under the RAP program you may receive interest relief or debt reduction (forgiveness), depending on the severity of your financial situation and your income level.

Zero Payment / Complete Payment Deferral Based on Income – the federal government allows for a relief from payments for individuals earning below a certain income threshold. For example, an individual earning less than $25,000 is not required to repay their student debt until their income exceeds this amount.

Repayment Assistance – if your income exceeds the Family Income Thresholds for Zero Payment, you may be eligible for a reduction in your monthly payment.

• During the first 10 years the government provides interest relief by subsidizing the interest costs on your student debt.
• After 10 years, if you still qualify, they may subsidize some of the principal payments as well.

Who qualifies for the RAP program? To be eligible under the Canada Repayment Assistance Program you must reside in Canada, be out of school for at least six months and you cannot already be in default on your student loans. Those with a permanent disability can qualify for consideration of disability-related expenses when determining financial eligibility. It is also important to be aware of various provincial student loan relief programs. In Ontario, OSAP debt is administered through Canada Student Loans so the above apply to graduates needing student debt help. If your loans were issued by PEI or Manitoba you will need to apply through your provincial student financial assistance office.

OSAP and student debt forgiveness under the Bankruptcy & Insolvency Act

Government guaranteed student debt is eligible for discharge and forgiveness under the Bankruptcy & Insolvency Act under certain conditions.

What is the seven-year rule?

The import date to know is the “date you ceased to become a student” or “end of study date”. This is not the same as your loan year or the last year you took out your student loans. It is this date that the government will use to determine eligibility for the discharge of your student debt under the BIA. You can verify your end of study date by calling 1-888-815-4514 for Canada Student Loans or 1-807-343-7260 for Ontario Student Loans.

Financial hardship – the 5 year rule

You can apply to the court to have your student debt discharged in a bankruptcy or proposal as early as five years after your end of study date if you can show that repaying your student loans will cause “undue financial hardship”.

You can be eligible under the hardship provision if you can show the court you acted in good faith in using and repaying those debts is causing, and will continue to cause severe financial difficulty.

There are many court cases discussing the considerations of “good faith”. Talk to your Licensed Insolvency Trustee if you think this is a viable option for you.

Newer student loans

Both a bankruptcy and consumer proposal should still be explored even if your student loans do not meet the seven-year rule if you have significant other unsecured debts like credit card debts. Obtaining a discharge of these debts can make student loan repayment easier.

Private student loan debt forgiveness options

Private loans, from a bank, parent or other financial institution, are repaid directly to your lender. They might include a student line of credit, student credit card or overdraft. Any term revisions must be negotiated with your student loan provider.

Private student loans are just like any other unsecured debt. There are no special rules or study period limitations to qualify for of loan forgiveness.  Any credit card debts, lines of credit or bank loans you used to fund the tuition fees and other costs of your education can be discharged in a bankruptcy or proposal with no limitations or waiting period. Read our article for more on repaying private student debt.

Student loan debt advice from a licensed insolvency trustee

Licensed Insolvency Trustees are the only government regulated experts on debt management and the only professional able to eliminate your student debt through a bankruptcy or proposal.  An LIT will review your specific situation to determine if you qualify for student relief and what option is best for you.

Discover how we can help you eliminate your student debt. Contact a Hoyes Michalos trustee in your area for a free consultation.

The post Guide to Student Debt Forgiveness appeared first on Hoyes, Michalos & Associates Inc..

On today’s podcast, we dive deeper into what financial hardship for student loans is and how it works with Richard Howell, a bankruptcy lawyer with Clark Farb Fiksel in Toronto.

Do I Qualify for Financial Hardship?

There is a special provision (Section 178 (1) (1.1) of the Bankruptcy & Insolvency Act for those interested) that allows the court can order that the seven year rule be lowered to five years as long as the applicant meets 2 conditions to qualify for financial hardship:

• The bankrupt has acted in good faith, and
• The bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the student loan.

In simple terms, these requirements mean that you have “tried your best” to make payments on the loan, but due to your circumstances you have been unable to do so, and as a result would suffer continued hardship if your student loan is not eliminated.

A Licensed Insolvency Trustee alone cannot make this judgement. You must make an application to court.

Once you have filed your hardship application, the court has three options: the court can either grant the application, which means the student loans are discharged completely; or they can deny the application, which means the student loans are there in their entire amount; or they can adjourn the applications [and review the application again in the future].

What Would be Considered Financial Hardship?

If your income is well above average, it will be very difficult to prove hardship.

However, if you are a single parent, with children, living on a moderate income, and also carry a $20,000 student loan, and you’ve been out of school for over five years, you may be a candidate for hardship relief.

Another common example would be someone who has an education in an area where they have been unable to find a job, so they have no ability to repay the loan.

If you were unable to complete your education through no fault of your own, you may be eligible for relief.  For example, if the private vocational institution you attended went out of business before you could graduate (and it has happened), you can’t get a job in your field because you couldn’t graduate, so you may be a candidate for relief.

What’s the Process to Apply to Court for Hardship Relief?

The first step is to talk to your trustee.  They can help you confirm that you meet the basic requirements (including the five year rule).  They can then advise you on how to proceed.

It is possible to make an application to court yourself, but your chances of success are generally increased if you are represented by an experienced lawyer.  However, lawyers charge fees, and depending on the complexity of your case lawyers costs could be in the same range as what you paid in your bankruptcy (although most will accept payments over time), so the cost is a consideration.

Resources Mentioned in the Show

• Student Debt and Bankruptcy
• What Happens in Bankruptcy Court?
• Richard Howell

FULL TRANSCRIPT SHOW 210 – What is Financial Hardship for Student Loans?

Doug Hoyes:          It’s the month of September, students are back in school and at this time of the year our thoughts turn to student loans. It’s a sad reality in Canada that a significant number of students are only able to pay for postsecondary education with the help of student loans. And if you graduate and immediately get a high paying job, you can pay back your student loan and all is good. But what happens if you can’t find a job that pays you enough to pay your living expenses and pay back your student loan, then what?

Unlike with most other debts you can’t simply go bankrupt to eliminate your student loans because we have a rule in Canada that says that government guaranteed student loans are only automatically discharged in a bankruptcy or consumer proposal if you have ceased to be a student for over seven years at the time you file your bankruptcy or consumer proposal.

To clarify, it’s not seven years from when you got the loan; it’s seven years from when you cease to be a student. So that’s seven years from when you graduated or seven years from when you left school. Let me emphasis another point. When I refer to student loans not being dischargeable in bankruptcy, I’m referring to government guaranteed student loans, which would include loans made under the Canada Student Loans Act or provincial programs like OSAP.

My guest on today’s show will make a comment on this a bit later. There are big banks that offer student lines of credit, often for professionals like doctors. That’s not what we’re talking about here. Those bank loans are not government guaranteed loans so they are not considered student loans in a bankruptcy so they are eligible to be discharged just like any other unsecured debt.

So what can you do if you’ve been out of school for less than seven years and you have student loans that you are having trouble paying? The first step is to do your research and see if there are any deferral or interest forgiveness programs that you may be eligible for. Obviously, if you have the ability to repay your loans that’s what you should do. Another option if you have a lot of other debts is to file a bankruptcy or consumer proposal to deal with your other debts, which may free up enough cash to allow you to service your un-dischargeable student loans.

There is one other option and it’s a very special case. Section 178 Sub 1 Sub 1.1 of the bankruptcy and insolvency act contains what we licensed insolvency trustees refer to as the hardship provision. And it says that if you go bankrupt and have a student loan and you have ceased to be a student for five years or more, you can apply to bankruptcy court to have your student loan discharged. There are two conditions, the bankrupt has acted in good faith and the bankrupt will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the student loan. What does acted in good faith mean? That’s a tricky question. A common interpretation is that you have tried to make payments on the loan but if you have financial hardship that may not be possible.

So what is hardship and what is good faith? Those are the first two questions I asked Richard Howell, a bankruptcy lawyer with Clark Farb Fiksel in Toronto. He was a previous guest on this podcast where he talked about bankruptcy court where he has many years of experience. So here is an example he gave of a typical student loan hardship situation.

Richard Howell:     Typically it may be a single mother for example that has no possibility of ever paying the loan and just will never have sufficient income to even make a dent. One of the factors in the act is whether they’ve made any payments on the loan, which seems to be I don’t know if a bit silly is too strong but if they could make payments on the loan they wouldn’t be court on a hardship application.

Doug Hoyes:          Yeah that’s kind of a –

Richard Howell:     Oxymoron.

Doug Hoyes:          Yeah it doesn’t really make sense.          So, okay so let’s say then I went bankrupt and at the time I went bankrupt my student loan was five years old. Obviously if it was more than seven years old I don’t need to go to court because it’s going to be automatically discharged so there’s this two year window between five years and seven years when this hardship rule kicks in. And I know when someone comes in to meet with me I say to them well, if we’re at year number six now you go bankrupt today your loan, student loan, isn’t automatically discharged why not just wait another year to get past the seven year mark? But in a lot of cases no, I’ve got a bunch of other debts, my wages are about to be garnisheed, I have to do this now.

So we go ahead and file the bankruptcy and then okay, you know what, student loans were a big number, I would like to go to court and see if I can get the student loan either reduced or eliminated. So, what would be the process? I guess the starting point would be well, let’s talk to a lawyer who knows how to do this. If someone comes in to see you, to talk about whether or not they should make a hardship application how would the discussion go, what kind of questions would you be asking, what would you want to know?

Richard Howell:     Well, typically when the phone if they’re going to come in to see me I’ll ask a couple of qualifying questions so we won’t waste everybody’s time. How much are you making? If you’re making 50 or 60,000 a year don’t bother coming because you’re not going to get the relief. Except, well I guess there’s an exception to everything but it’s going to be highly, highly unlikely. The people that typically come in may have got a degree in computer programming’s a good example and they’ve been working for the last 12 years as a pizza delivery man because there’s no jobs. They’ve got a couple of kids and a wife and they can’t make ends meet. They’re a good candidate. Or as a single mother with a couple of kids and making minimum wage, they’re a good candidate.

Doug Hoyes:          So the qualifying questions, the first one would be how much are you making, what kind of income are you earning? What would be the second qualifying question you’d be asking?

Richard Howell:     Well just the timing on the loans, do you fit into the five-year period?

Doug Hoyes:          Just to make sure that it qualifies. So if I phone you up and say hi, Richard, I’m a doctor. I make $200,000 a year, I’ve got $300,000 worth of student loans because of all the degrees and everything I’ve got and it’s a lot of money and I can’t pay it you’re going to say to me, in terms of a hardship application I don’t have much chance, is that correct?

Richard Howell:     Yeah, although apropos, the doctors normally have a loan from a particular bank, which will remain nameless, that is effectively a student loan. It’s typically 100 or $150,000. The bank in question attempted to characterize the loan as a student loan and try and prevent the bankruptcy applying. The court said nothing doing, that was a credit decision for the bank, it’s not the public’s money, get out of here bank.

Doug Hoyes:          And we won’t say what the name of the bank is but you can email me and I’ll tell you what their three initials are if you want to know more. And so yes, you’re making a key point and that is we’re talking about government guaranteed student loans. So if you go to the bank and get a student line of credit, which is what this particular one is called, then no, that doesn’t go under these rules, that’s just like getting a Visa card. It’s a loan that the bank granted to you on the basis that they figure well, once you’re a doctor you’ll be able to pay it back so the bank then could not go back to court and say oh, yeah this falls under the same student loan rules. So, that’s again why you’re asking these two qualifying questions then.

Richard Howell:     Exactly but let’s be careful not to mix a student line of credit guaranteed by her majesty with the bank’s student line of credit that’s not guaranteed.

Doug Hoyes:          Got you. So, I mean I gave the example of OSAP earlier obviously that is a loan directly from a government agency, it is also possible to have a student loan from a regular bank but if it’s guaranteed by the government then it would fall under the rules we’re talking about.

Richard Howell:     Exactly.

Doug Hoyes:          That’s the key point then. So okay, the bankrupt phones you up and you have a discussion on the phone and they say I have an education but I have not been able to get a job in my field maybe, you know, I’m a computer programmer but I know a bunch of languages they don’t use anymore because now everything’s all apps on a phone and that’s not my area of expertise so I have not been able to earn considerable income as a result of my education. I’ve got, you know, a family, I’ve got expenses, I’m a single parent, something like that. And so you say OK you’re probably someone that would qualify for this process.

So then the next step I assume I come in and meet with you in person and obviously, you know, you’re a lawyer you don’t do this for free, there’s a fee to be charged. And if someone wants to know what that fee is give you a call because every situation is going to be different I assume. Some cases are simple, some cases are more complex. So they come in to see you, what types of things are you going to want to know, what happens next?

Richard Howell:     Well, I’m going to want whatever bankruptcy documents they’ve got. I’m likely going to have to go to the bankruptcy office and have the file brought in from Cooksville where they store them so that I can see everything in the file. The court’s going to want everything in the file when we go in any event. I’m going to want to see their tax information of the last few years, returns, notices of assessment. And I’m going to want a statement of income and expense on a monthly basis showing where the shortfall is and that they are actually suffering hardship.

Doug Hoyes:          And then from there you prepare a bunch of paperwork I guess.

Richard Howell:     Yeah it’s a reasonably simple affidavit. It covers the basis and then we put the affidavit in with what’s called a motion record, we serve the trustee and any opposing creditors and oh, of course her majesty probably in both capacities if they’ve got a federal loan and a provincial loan, finding where you serve her majesty’s always a little bit of a challenge. We think we’ve got it nailed at the moment but times change.

Doug Hoyes:          I know, it’s always difficult for us too as to who’s got carriage of this? Because obviously the loan happened many years ago and so it may be a different address, different department whatever. So you prepare all this paperwork, send it out to the student loans people, the trustee, any other creditors that may be interested in the matter and then it’s going to take a period of time before the actual court appearance happens, right?

Richard Howell:     Well, you have to serve with 10 days notice. From the time you mail it, it has to be at least 10 days prior to court. The practicalities are the Ontario Student Loans are last time I did one of these are situated in Thunder Bay. And typically they get the mail, they look at it at some stage of the game, probably late. And the day before the hearing you get a call from the student loan lawyers in Toronto who say we need an adjournment. So of course you give it to them so you get kicked another couple of weeks. But it does mean two attendances at court and a little more messing around.

Doug Hoyes:          Yeah and with Toronto court it’s not like fast food place where you can just go in and get an appointment, things are scheduled in advance, it takes time to get there, right?

Richard Howell:     Well it’s reasonable. We can get a motion date for example, maybe three to four weeks out is –

Doug Hoyes:          And obviously it would depend on the time of the year. Over the Christmas break it’ll take a little longer, and over the summer perhaps if there’s vacations and whatnot. But generally it can be done reasonably quickly is what you’re saying. So, then on the appointed day you go to court, you would have the bankrupt with you I assume?

Richard Howell:     Not as a rule. It’s – I sort of like to have them around in case there’s questions but it’s not strictly necessary.

Doug Hoyes:          Okay. And so, I mean I guess if it was me and this was a big deal I would want to be there too just in case the judge wants to why aren’t you working or whatever? Obviously you’ve got this all in your motion material and your affidavit and everything but I guess as a backstop it’s nice to have them there. And so you then at the appointed time appear in court, you present your arguments, obviously a lot of it is in writing already.

And what is the typical response of the student loans people? Because obviously they’re the only ones who are going to object to this, no one else really is interested. I mean as a trustee on the case I don’t really have an opinion one way or another. I would obviously like the bankruptcy to get a break and everything but the court doesn’t really care what I think in this particular case, it’s not really up to me. What typically are the student loans people doing? In other words are they very often showing up in court and banging on the table and trying to argue the motion or is it more likely that they’ll say yeah, we understand this probably is a hardship case and they don’t argue it?

Richard Howell:     I think it’s fair to say they’re typically atypical.

Doug Hoyes:          Okay, so there is no rhyme or – there is no obvious thing that’s going to happen.

Richard Howell:     No, the spectrum is if it’s meritorious, righteous application they’ll look at it and say yeah, this person can’t pay, we’re not fighting this. They’ll send you a letter saying her majesty does not oppose.

Doug Hoyes:          In which case you go to court and you stand up and say I’ve got a letter saying her majesty doesn’t oppose and it’s pretty much a done deal at that point I would think.

Richard Howell:     Yes, expect her majesty can be of two minds of course. Her majesty in Ontario can have a different opinion than her majesty Ottawa.

Doug Hoyes:          Got you. So the feds may object, the provincial may not in which case then the court has a decision to make.

Richard Howell:     Yeah, pretty much or you end up with the council in court for the objector and you make a deal before court.

Doug Hoyes:          So explain to me making a deal before court then. So the court hearing is I don’t know it’s at 10:00 in the morning, it’s at 2:00 in the afternoon, whatever it is. And you all know who’s on the docket beforehand and so is it the kind of thing literally on the courthouse steps. You pull a person aside and say look, here’s what I’m going for, what do you think? Is that how it is or is done on the phone in advance, what typically would happen?

Richard Howell:     Well, it depends I know the council for the – well, I know the council for the province who’s normally the same one. And I can phone her ahead of time, not too far ahead of time because they just delivered the file to her 15 minutes before the hearing. But subject to that we can usually kind of come to an agreement beforehand. With the feds if they’re coming down the lawyer from justice gets the file, well if it’s a 10:00 hearing normally it’s 9:30 for the first time to look at it. That’s a bit cynical but also true.

Doug Hoyes:          Well, I’ve certainly been in court where in exactly the situation you’re describing and the judge, the register, the master, says to the opposing creditor’s lawyer okay what do you want to do? Last week we had a case, it was very similar to this and there was a lot more money and no one was here and they say well, I don’t know, I don’t assign the cases to myself I just got the file, you say, yesterday or 15 minutes ago. So, in that scenario then you’re going to try to get them on the phone in advance. But if that’s not possible then like literally just before the hearing then you kind of pull them aside and see what can be done?

Richard Howell:     Yeah, you make your deal if you can and if not tough it out. I haven’t toughed out many. One of the ones I remember is it was before a registrar [Nette] as he then was. And my guy was saying that oh, he couldn’t get a job and yadda, yadda and that he was driving a taxi and the registrar said let me see the driver’s licence. And so he handed him up the driver’s licences and the registrar Nette knew such things and he said to me yeah, your client has a commercial long distance trucker licence here, get out of here effectively.

Doug Hoyes:          Yeah, so he can get a job making good money so that’s what he should do.

Richard Howell:     Precisely.

Doug Hoyes:          So is it fair to say that in most cases that you’ve been involved with because you’ve in effect, you know, I don’t want to use the word pre-screen, but you’ve asked questions beforehand and so you know the chances of success are reasonably good before you take on the case that in most cases the court in your experiences amenable to this type of hardship application?

Richard Howell:     Yes, although technically the court has to either wipe the loan out or not, they can’t make a deal and say pay half or pay some percentage of the loan.

Doug Hoyes:          So it’s almost like arbitration in baseball, well I say this, you say that and they’ve got to pick one.

Richard Howell:     Yes. But that being said there have been occasions on which something’s been worked out and I’m not going to give you the particulars.

Doug Hoyes:          And I think the kind of message there is ultimately the court can do what the court wants to do. I mean that’s why there’s a court.

Richard Howell:     Well, no it’s normally done at the let’s make a deal level.

Doug Hoyes:          I see and the court either doesn’t object to it or blesses it or whatever.

Richard Howell:     If council are happy.

Doug Hoyes:          The court is happy.

Richard Howell:     Yeah.

Doug Hoyes:          So I guess the message there then is that if you are, you know, going to have a lawyer going to court for a hardship application it’s good to have someone with some experience and the ideal scenario is work something out in advance with the opposing creditor if there is one so that you can go to court and get the deal done. That’s generally the better option.

Richard Howell:     Exactly. And just an aside as far as lawyers and costs are concerned my old mentor once said if you want nice fresh oats you have to pay the price. If you’re satisfied with oats that have already been through the horse it’s a lot cheaper.

Doug Hoyes:          It’s a lot cheaper. So, yeah and I guess this is kind of the trick in a hardship application, that the whole point of going to court because I can’t pay my student loan is because I don’t have the income to do it. And so, you know, do I have the money to hire a lawyer to go and do this? I assume in most cases, I mean obviously you’re going to get something upfront if you’re going to be showing up court and everything. But is it fairly typically that you’re going to put the debtor on some kind of payment plan if they can’t pay for it all upfront?

Richard Howell:     Yeah, it comes with the territory, something’s got to be worked out. It depends on what the clients got. Normally something can be worked out.

Doug Hoyes:          Got you. So that’s obviously the answer then, sit down with the lawyer upfront, find out what kind of makes sense and go from there. Excellent, well I think that’s a good way to end it. So in simple terms this is a provision of the act that’s there but as you’ve said it’s not a very common thing, I mean it only applies to people who have a student loan, they’ve gone bankrupt and it’s between five and seven years on the clock, which is obviously a limited number of people, most people are going to wait till after the seven years. I mean if you can get through five years you can get through seven. But for a certain number of people this is a viable option.

Richard Howell:     Yeah, for the other people that can’t pay the loan [no hope] they’re not going to get the hardship relief. The only other possibility is a second bankruptcy or consumer proposal. It seems kind of sad that the student loan comes to that at the end of the road.

Doug Hoyes:          So you would complete your first bankruptcy, which maybe is completed in year five or six after you’ve left school. And then it might be that after year seven then at that point maybe the only debt you’ve still got is the student loans and at that point then it’s either a bankruptcy or a consumer proposal to deal with it.

Richard Howell:     Yes and if there is a possibility depending on the amount of the loan that students loans will come in and ask that there be a condition of your discharge, that you pay a chunk of the loan, it’s remote. But I haven’t actually seen it done to defeat a student loan.

Doug Hoyes:          But it could happen. I guess that’s kind of the message in a bankruptcy, that any creditor has the ability to object to your bankruptcy ending. That’s just how the process works.

Richard Howell:     Yeah, exactly.

Doug Hoyes:          Excellent. Well, I think that’s a good way to end it thank you very much Richard. That was our discussion about student loan hardship applications, thanks very much.

Richard Howell:     My pleasure.

Doug Hoyes:          That was my conversation with Richard Howell about student loans and the hardship provisions. And I agree with is comment that this situation is kind of sad. When I went to university, over 30 years ago, it was possible to get a summer job where you could earn enough to cover your tuition and books. If your parents helped out with living costs or you got a part-time job while you were in school, you could easily graduate with no student loans.

Today it is virtually impossible to find a summer job that pays enough to cover your education costs. So if you don’t get help from parents or scholarships and grants you have no choice but to get a student loan. If you can’t find a good job when you leave school, student loans become a big financial burden. I know that over 15% of people who file a bankruptcy or consumer proposal with my firm, Hoyes Michalos, owe money on student loans at the time they file. And they owe around $14,000 on student loans when they file. That’s a big number. I’ve advocated for more fair student loan rules for many years and I’ll keep doing so. But for now, if you have student loans you can’t pay, you do have options.

As I said at the start of the podcast if you have a lot of other debts it may make sense to file a consumer proposal or bankruptcy to deal with those debts. So even if your student loan is too new to be dischargeable, dealing with the other debts may free up enough cash to allow you to service the student loan.

As Richard Howell said on the podcasts, if you have no choice but to file now it is possible to file again after you reach the seven year mark. And, as we discussed today, a hardship application may be an option after five years. What’s the best option? Every case is different. So your best option is to talk to a licensed insolvency trustee. The only debt professionals licensed by the federal government and by law there are no upfront fees.

That’s our show for today. Full details on student loans and the student loan hardship rules and a full transcript of today’s show can be found at hoyes.com. Until next week, I’m Doug Hoyes, thanks for listening. That was Debt Free in 30.

The post What is Financial Hardship for Student Loans? appeared first on Hoyes, Michalos & Associates Inc..

Most student loans are government guaranteed which means that the bank that provided the funding is protected in the event the loan goes into default.

In order to protect the government from a run on unpaid student loans, rules were added to Canadian bankruptcy law that state a student loan will not be covered or extinguished after bankruptcy or a consumer proposal if it has been less than 7 years from the last study date.

After this 7 year ‘waiting period’, if you haven’t been able to repay your student loans, personal bankruptcy or filing a consumer proposal can be a good option to obtain relief from your student loans.

Read Transcript

If you are considering filing a bankruptcy or consumer proposal and have student debt, it is important that you confirm your official ‘end of study date’. This date doesn’t mean the last day you attended school.  It is the date that the government considers to be the last date of the program you were last enrolled in. It also includes both full-time and part time attendance.

You can verify your end of study date by calling 1-888-815-4514 for Canada Student Loans or 1-807-343-7260 for Ontario Student Loans.

The rules around bankruptcy and student debt relief can be quite complicated, so it is important to talk through this 7-year rule with your Licensed Insolvency Trustee before filing.

Here is one example about what happens if you get the dates wrong:

Last Date of Study: Actual Case File

A few years ago, we met with Frank (not his real name) in our Vaughan bankruptcy office. He had enrolled in a human resources course at Humber College. To pay for the costs of his books and tuition, like many, he took out a student loan. For a variety of reasons, Frank eventually decided to quit in his final year. That was about 7 years ago.

After leaving Humber, Frank was unable to find steady employment, and unfortunately started to rely on credit cards to help cover his ongoing living expenses. Now married with a young child, Frank was finding it increasingly difficult to keep up with his student loan payments and his credit card payments and realized that he was in trouble. He came in to see us for a free consultation and we reviewed with Frank what his options were given his current financial situation. He decided to proceed with the filing of a bankruptcy. We explained to Frank about the special treatment of student loans and he was sure that it was more than seven years ago that he was at Humber, so he was certain that the bankruptcy would allow him to get rid of all his debts including his student loans. Frank filed for bankruptcy, and after nine months he received his discharge.

About six months after his discharge, Frank called us up and said that he was getting calls from the government wanting him to start making the payments on his student loans. They were even threatening to take legal action. While Frank was confident that he left school more than seven years ago from the date of his bankruptcy filing, the government was saying that while he may have left Humber more than seven years ago, they were relying upon the completion date of the courses that he was enrolled in rather than when he left Humber. As it turned out, the government was correct, and Frank was still liable for his student loans.

The message to learn here is to never proceed with any formal insolvency proceedings without first verifying the exact last date of study according to the government records.

While Frank was disappointed, we suggested that he see if he can apply to bankruptcy court to have his student loan included in his initial bankruptcy filing. Frank had been conscientiously paying his student loans for many years and without completing his education, he just could not find a job earning enough money to support his new family. Fortunately for Frank, the bankruptcy judge sympathized with Frank’s personal situation and agreed to order that his student loans be covered in his bankruptcy.

Frank was lucky that this did resolve to his benefit. However, always confirm your last date of study not only with your trustee, but with your student loan records.

If you need help with student debt, contact a Licensed Insolvency Trustee today for a free no-obligation consultation where we will look at all your debts with you and help you decide if a bankruptcy or consumer proposal makes sense to deal with your student debt.

The post Student Loans and the 7 Year Rule appeared first on Hoyes, Michalos & Associates Inc..

How Are Student Loans Treated in a Bankruptcy?

A government guaranteed student loan is only discharged in a bankruptcy if you have ceased to be a student for over seven years at the time you file bankruptcy. So it is very sad that 15% of our clients still have student loan debt at the time they file with us, meaning they’ve been trying to pay that back for seven years already.

Even worse, the burden of student loans are disproportionately felt by women.

What’s The Solution for Repaying Student Debt?

On today’s podcast I review the numbers, and discuss how student loan debt impacts society, and I give seven practical tips for dealing with student loan debt. Those tips are:

1. Consider the end game. Ask yourself what type of job you can get when you graduate, and whether or not you will earn enough to repay your student loan.
2. Research and apply for all possible scholarships and other assistance that’s available. A grant or scholarship is better than a loan, since they generally don’t need to be repaid.
3. Beware of “front loading”. Many students qualify for scholarships or other aid in their first year based on their high school marks, but then not qualify in future years.
4. Don’t borrow any more than you expect to make your first year out of college.
5. Assess your chances at finishing the program on time, since your future earning power is directly tied to whether or not you graduate.
6. Education is not something you go to school for, and then it stops. The world changes fast, so what you learn in college may be out of date very soon after you graduate.  Be prepared to keep learning.  Focus on continuing to improve your skills.
7. Be sure you fully understand what happens if you don’t pay your student loans.
8. Understand your options if you need student debt forgiveness.

Resources mentioned in this show: 

• The Canadian Federation of Students report, The Political Economy of Student Debt in Canada 
• Statistics Canada Reports: What Recent Graduates Make and Graduating in Canada: Labour Market Outcomes and Student Debt
• Canada Student Loan Repayment Assistance
• Doug Hoyes testimony before the Senate Banking, Trade and Finance Committee in 2008
• Hoyes Michalos submission to Parliament, 2014 
• University of Toronto website, tuition fees 
• University of Toronto tuition fees, advanced programs 
• Joe Debtor Study The Student Debtor
• Student Debt FAQs by Hoyes Michalos

FULL TRANSCRIPT Show #158 with Doug Hoyes

I’m recording this edition of Debt Free in 30 in September 2017, just as the new school year is getting under way, and today I want to ask a simple question, with a complicated answer:

Is your student debt sustainable?

In the first half of today’s podcast, I’ll look at some numbers that show how big student debt is in Canada. In part two I’ll move on to some recommendations about how to deal with the problem – both as individuals and as a society.

The Canadian Federation of Students published a report in April titled The Political Economy of Student Debt in Canada, and they quote some scary numbers:

• The average student debt for a four-year program is $26,300
• Tuition fee revenue to post-secondary institutions has tripled since 2001.
• Total interest paid by a borrower to the Canada Student Loans Program in financing $30,000 of student debt over 10 years (2017): $10,318.87

So if you complete a 4 year program, the average student ends up with almost $30,000 in student loan debt, and if that loan remains outstanding for the next ten years, you could end up paying over $10,000 in interest on that loan.

Statistics Canada published a study in 2015 that said that the median income, 3 years after graduation, of:

• College students was $41,600 and
• Of university graduates with a bachelor’s degree was $53,000

So if you complete a four year program, 3 years later you might earn, on average, $53,000, but you will have, on average, $26,300 in student loan debt, which is about half of your salary after three years.

These are of course average numbers; some people will earn more, some less, but those are still staggering numbers.

Let’s assume that on your $53,000 salary you have to pay 25% in income taxes, so that leaves you with say $40,000 in net income, or $3,333 per month.

Let’s say you can find a really inexpensive place to live, and your transportation costs are low, so perhaps you have $500 per month for student loan payments.

On your $26,300 student loan, with interest, that’s still around 5 years to pay it off, and that assumes you never lose your job, or get sick, or have any unusual expenses.

That’s a lot of money.

The high cost of student debt has many social implications.

If you have to live in a tiny apartment to save money to pay off your student loan, and if you’ll be paying your student loan for many years, what are the chances that you’ll be getting married and starting a family anytime soon?  Or buying a house, or even a new car?

And of course, there is the obvious result of high debt: bankruptcy.

As regular listeners to this podcast know, you can’t graduate from school one day and go bankrupt the next day to get rid of your student loans.

In Canada, we have a seven-year rule.

A government guaranteed student loan will only be automatically discharged in a bankruptcy if you have “ceased to be a student” for at least seven years before you file your bankruptcy or consumer proposal.  It’s not seven years from when you got the loan; the seven-year clock only starts ticking when you cease to be a student, which generally means the end of the last term you were a student, or when you graduated.

While I’m sure many former students would like to file a consumer proposal or bankruptcy to deal with their student loan debt, they can’t, unless they are willing to wait seven years for the automatic discharge rule to kick in.

But here’s the scary part: even with this seven-year rule, 15% of people who file a bankruptcy or a consumer proposal have a student loan at the time they file, and that’s up from 13% two years ago, so the situation is getting worse.

We compile these stats in our Joe Debtor study. That’s how I know that for our clients that have student loans, they still owe almost $14,000 in unpaid student loans at the time they filed for insolvency.  And again, remember that if student loans are the big problem, you’ve got to wait seven years before you can get bankruptcy protection. My clients have been attempting to make payments on their student loans for seven years or more before they go bankrupt. Many have already paid back thousands of dollars in student loans and interest.

So why do people go bankrupt?

Because they have no other choice.

• But, you say: student loans generally have interest rates that are a lot lower than credit card interest rates,
• the government has repayment assistance plans,
• graduates got an education to earn a higher income

True enough but for many, this isn’t enough.

You can’t apply for a repayment assistance plan until you have been out of school for at least six months, and to be eligible, your loans must be up to date.

These repayment assistance plans may reduce your payments, but it’s also possible that even with the reduction in payments your repayment plan can last for up to 15 years after leaving school.

Unfortunately, repayment assistance plans are not a solution for many people. A lot can happen in 15 years. You can lose your job or get sick. Deferring payments doesn’t help get rid of debt, it just punts the potential problem down the road.

That’s all bad news, but I haven’t told you the worst part:

Student loans debtors are much more likely to be women.

Women owe more in student debt, are more likely to have a dependent, are more likely to be a single parent, and are more likely to be unemployed at least part of the time.

Here are the numbers: 

• 62% of student debtors are women
  • 55% with dependent (34% males)
  • 35% lone parent (4% males)
• $14,328 student debt ($13,071 males)

Student loans are a big problem for both men and women, but why are they an even bigger problem for women?

One reason is that, as the numbers show, women are more likely to have a dependent, or be a single parent, so they have added financial pressures that make student loan repayment more difficult.

Most of our clients are working at the time they file; 88% of males are working, and 80% of females are working, but that slight disadvantage for women, again, makes it harder to deal with their student debt.

I don’t have detailed statistics to prove it, but I suspect that having responsibilities for a dependent also has an impact on employment for women.

Of all our clients, 17% are the head of a single parent household, with an average of two dependents.

For female student debtors this ratio was 35%.  In other words, just over one third of women filing insolvency with student loans were single parents.

Single parents have household income below that of the average debtor, and that makes it more difficult for the single parent to support two dependents plus herself. Add student debt repayment on top of that burden and again, it is often the first payment to be pushed aside when prioritizing monthly expenses.

It is true that female debtors have less debt than the average for all of our clients, but with a lower and unstable income that makes it more difficult to service their debts.

Our average female client with student loan debt has only $282 available each month for debt repayment, so you can see why it’s very difficult to service over $14,000 in student debt, and all other debts, on that small amount of cash flow.

Based on these numbers, the answer for many former students to the original question: is your student debt sustainable, is “no”.

Those are the numbers, but this is not a story about math; it’s a story about people.

It’s obvious that there are an increasing number of students who get increasingly large student loans, and have great difficulty paying them off.

Our average client with student loan debt is 35 years old.  That means they have been trying to pay back their student loans for a long time, and they just can’t manage it.

Their student loans lead to other debts, which leads to even more debt, and finally a consumer proposal or a bankruptcy is their only option.

So what’s the solution?

For starters, I have long been a proponent of shortening the seven-year rule to something more reasonable.

In 2008, when Parliament was considering changes to bankruptcy legislation, Ted Michalos and I travelled to Ottawa and testified before the Senate Standing Committee on Banking, Trade and Commerce.

At that hearing, almost 10 years ago, I told the senators that our typical student loan debtor was a female, aged 37, with over $8,000 in student loan debt.

Well, here we are, in 2017, and our typical student loan debtor is still a female in her mid-30s, but instead of owing $8,000 in student loans, she now owes over $14,000.

Obviously, the situation has gotten much worse in 10 years.

I’ll post a clip from YouTube of my testimony in the show notes.

At that hearing, I proposed that the student loan discharge period, which at the time was 10 years, be shortened to two years.  The government did amend it from 10 years down to 7 years, but I didn’t think that was enough.

That was ten years ago.

Three years ago, in the summer of 2014, the government again reviewed bankruptcy legislation, and we again proposed a shorter student loan discharge period.

Since we knew, based on the results from our past testimony, that the government wouldn’t go for a shorter period like 2 years or 5 years, , this time we suggested the waiting period be for as long as the program of study, with a maximum period of 5 years.

So, if you took a four-year degree program, your waiting period would be 4 years.  A one-year program at a vocational school would have a one year waiting period.

The government ignored our suggestion.

So what do I think today?

I think you can make the argument that student loans should be treated exactly the same way we treat credit card debts, or income taxes: if you meet the requirements to file bankruptcy, your debts should be discharged.

However, I understand the counter-argument.

The knowledge you gain from an education is with you for the rest of your life, so it’s not fair that you just go bankrupt and eliminate your student loans.

Okay, I don’t fully agree with that argument, but fine, make it a two-year rule then, so that we don’t have a wave of new doctors going bankrupt the day they graduate.  I’ll suggest that to the government the next time they consider changes to bankruptcy legislation, which is currently scheduled for 2018.

But all of this talk about changing the bankruptcy rules is missing the point.

We are talking about treating the symptom, not the real problem.

The problem is that if, after you finish school, you can’t get a job that pays you enough to pay off your student loans, that means it costs too much to go to school!

Perhaps that’s the problem: school costs too much.

I’ll admit I’m an old guy.  I graduated from university 30 years ago, in 1987.  In my day, tuition only cost around $1,000 for a full school year.

Now I realize there has been inflation since then, but when I go to the Bank of Canada inflation calculator I find that $1,000 in 1987 is about $1,900 in today’s money.

I’m a Commerce and Economics graduate of the University of Toronto, so I went to their website and discovered that the first year tuition for a Commerce student is $6,400.

I also discovered that the tuition for years 2, 3 and 4 is over $16,000!

If you take one of the very difficult programs, like engineering, the first year tuition is over $14,000!

So how is it possible that I paid $1,900 in tuition for my last year of university 30 years ago, adjusted to today’s dollars, and if I was doing the same program today it would cost $16,000?

I’m no “rocket surgeon”, but it sure sounds like university is more expensive, and I doubt they are spending that much more on the students.  I don’t think the professors are getting rich either, so I assume that administrative costs and overheads are the reason for the much higher cost.

How can universities afford to spend so much more on overheads?

Student loans!

The government guarantees student loans, so the universities don’t care if their students get a good education and can pay back their loans; it’s not their worry.

When Ford Credit loans you money to buy a car, they want to make sure you can pay it back, or they may lose money.  That’s not the university’s worry, because it’s not their money.  If you don’t pay it back, they don’t lose anything.

So is the answer for the government to stop guaranteeing student loans?

That would certainly reduce the cost of education, because virtually no-one would be able to afford to pay the high fees without a student loan, but that would probably also mean that a lot of deserving students could not go to school.

Perhaps the answer is to penalize the universities if their students default on their loans.  That may encourage the universities to charge reasonable fees, and to do their best to ensure that they are offering worthwhile programs that will make their students employable when they graduate.

This is a complicated issue, and I admit that I don’t know how to solve the problem for society.

So I won’t.

But here’s what I will do:

If I can’t make the government listen to my suggestions, let me instead give you some practical suggestions that will help you, or your kids, stay out of the student loan quagmire.

Here are my seven tips for you, or your kids going to college, to keep student loan debt manageable.

First, and most importantly, consider the end game.  We get caught up in the emotion of graduating from high school, and we want to get started at college or university, so we think about what courses we will take, and where we will live.  That’s great, but we should also spend time thinking about what we will do when we finish school.

Will there be jobs available in the area I’m studying?  What do they pay?  Will I have any chance of paying off my student loans when I graduate?

Yes, I realize the there is intrinsic value in learning how to think and in learning how to manage as an adult while in University. But if I’m going to graduate with $50,000 in student loans, and it’s unlikely I’ll find a job in my field that can repay that debt, I should re-think my plan.

Think about the end, not the beginning.

Over the years I’ve met with hundreds of people with student loan debt, and in a lot of cases they never thought about what type of job they would get when they graduated, and I think that’s a mistake.

That’s the big picture; here’s some more specific advice:

Advice for students and their parents:

1. Consider the end game.
2. Research and apply for all possible scholarships and other assistance that’s available.
   1. The tuition may be $10,000 a year, but if you qualify for a $5,000 scholarship, that obviously reduces your costs.
   2. A scholarship or grant is better than a loan.
3. Beware of “front loading”. Many students qualify for scholarships or other aid in their first year based on their high school marks.  But it is very common for your marks to decrease in second year, so you may not be eligible for academic scholarships in second year.  Universities know this, so they offer a good entrance scholarship to get you in the door. Be sure you understand the full cost, not just the cost of first year.
4. Don’t borrow any more than you expect to make your first year out of college.
   1. This takes a lot of research, and at best it will only be a guess, but it’s a good benchmark. The more you expect to earn, the more you can reasonably repay, so there may be some justification for a higher student loan in a higher earning field.
   2. Stick with schools that will allow you to stick to that rule.
5. Assess your chances at finishing the program on time, since your future earning power is directly tied to whether or not you graduate. You are at a higher risk of defaulting on a student loan if you:
   1. Switch programs part way through, and have to start over, or
   2. Switch colleges, or
   3. Take longer than four years to complete a four-year degree

6. People with $5,000 in debt are often at greater risk than people with $50,000 in debt, because they are the people who didn’t complete their education, so they didn’t incur a lot of debt, but they also didn’t get the degree to allow them to earn more income.
7. Education is not something you go to school for, and then it stops. The world changes fast, so what you learn in college may be out of date very soon after you graduate.  Be prepared to keep learning. Focus on continuing to improve your skills.
8. Final point: be sure you fully understand what happens if you don’t pay your student loans.

This final point is important.  As I said earlier, you can’t just go bankrupt when you graduate and eliminate your student loans.  You are stuck with your student loans for a long time, and the government has the power to seize your tax refunds if you aren’t paying, so be sure you understand the implications.

If you are a parent, and you are co-signing a loan for your child, you are taking a risk, so again, be aware of the risks.

If you are listening to this show and you have already finished school, and you are struggling with your student loans, reach out for help.

Even if your student loans are not seven years old, you may have options.

My firm, Hoyes Michalos, has done thousands of consumer proposals and bankruptcies for people over the years with student loans, and in many cases dealing with all your other debts, like credit cards and bank loans, gives you the relief you need so you can manage your student loans.  So, even if your student loans won’t go away, there may be solutions.

I started the show by asking a simple question:

Is your student debt sustainable?

For many of our clients, the answer is “no”.  It’s impossible to pay back.

What’s the solution?

As a society we need to take a hard look at what we are getting for the money we spend on education.  Perhaps it’s not wise for governments to provide encouragement for everyone to get a four year degree by guaranteeing student loans.

I’ve tried, but I haven’t been able to convince the government to change the seven year student loan rule, so that means it’s up to you to take care of yourself.

This is a topic we will address many more times in the future, but for now, be sure you understand the rules, and make sure you pay attention to what will happen when you finish school, not just what happens at the start.

And finally, remember that you, or your child, are an individual.  You have to do what’s right for you.

If you want to be a doctor, you need to go to university.

But if you aren’t sure what you want to do, perhaps a better plan is to work for a year, or take some courses part-time, until you have a better idea of where your interests lie.  That way you gain some work experience, some time to consider your options, and you delay or perhaps avoid taking on excessive student debt.

That’s our show for today.

I’ll put full links to everything we discussed today in the show notes over at hoyes.com, that’s hoyes.com that’s h-o-y-e-s-dot-com, and a full transcript is also available.

Our website also has full contact information if you want to discuss your student loan options.

Thanks for listening.  Until next week, I’m Doug Hoyes, that was Debt Free in 30.

The post Is Your Student Debt Sustainable? appeared first on Hoyes, Michalos & Associates Inc..

Money and debt. These two words tend to be used interchangeably and yet they are so different.

Lesson #1 – Call it what it is – Student Debt

Your student loan is debt – not money.  It was Mark Twain who wrote:  “But language is a treacherous thing….”  Phrases and words can become commonplace and be used without conscientious thought.  But what we say openly and tell ourselves internally can influence our beliefs and behaviours.

Each time you spend your student loan, know that you aren’t using your money, you’re taking on more debt. That debt will need to be repaid and with interest shortly after you leave school. Having this clarity may help you to be more mindful about your spending habits.

It is far easier to get into debt than it is to get out of debt. This seems straight forward, but the wires clearly aren’t connecting as Canadians continue to take on more and more debt.

Lesson #2 – Student Credit Cards 101

Expect to be approached by credit card companies during this phase of your life.  Establishing a credit rating is a good thing, but understand how these cards work. Also ask yourself if you can live without a credit card. They can be extremely expensive if you don’t pay off the full balance  each month. Minimize your post-secondary debt load as best you can. To help balance your debt to income ratio, apply for grants and scholarships, work between semesters or even throughout the year if possible.

Lesson #3 – If your name is attached to a bill, you are responsible for it.

At some point, you may decide to rent a house with some roommates off-campus. Be cautious not to put all the bills in your name.  Your creditors won’t care if your roommates were supposed to split the bill. They can only pursue the person/persons with their name on the bill.  Consider dividing up bill responsibility as equally as you can i.e. one person takes on hydro, someone else heat etc. Each roommate should take on some risk.  When you move out, whether it’s on your own, or the whole house moves, make sure to remove your name from the bill.

Lesson #4 – Understand the repayment terms of your student loan.

How much will you need to pay back each month and at what interest rate? Your lender may give you the option to choose a fixed or variable rate. Fixed means the interest rate does not change, but your lender will build in a safety cushion for themselves. A variable rate will fluctuate with the market and this means that your payment will also. By understanding your terms and repayment schedule in advance, you can avoid any unpleasant surprises. 

Read Transcript

Lesson #5 – Learn how to budget your student expenses now.

This is a life skill that you will carry with you for the rest of your life. Knowing how to budget will give you freedom, oversight and can save you thousands of dollars. There are some terrific tools available including our budget workbook. You can go to a not-for-profit credit counselling organization and meet with a budgeting specialist.

Post-secondary education is the time in your life where you learn to grow. You’re not only expanding your knowledge base, but you’re also increasing your real-life experiences. Enjoy those experiences, but make sure to mitigate your risk when it comes to debt.

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Specifically, section 178 (1)(g) of the Bankruptcy & Insolvency Act states that the following debts are not automatically discharged in a bankruptcy or consumer proposal:

These same rules apply whether you are filing a consumer proposal or filing bankruptcy for student debt in Canada.

What It All Means – 7 Years is the Key

For those of you who are not lawyers, here’s the translation of the 7-year rule for student debt:

1. If you have been out of school for more than seven years, your student loan will be eliminated in a consumer proposal.
2. If you have been out of school for less than seven years, your student loan may not be automatically discharged, even if all of your creditors accept your consumer proposal.

Here’s an example:

• Former student A has $25,000 in debts (say $15,000 in credit card debts and a $10,000 Canada student loan).  Her last date of study was 8 years ago. She could file a consumer proposal. If her proposal is accepted, her student debt would be eliminated because those student loans are more than 7 years old.
• Former student B has the same debts except that his last date of study was 6 years ago. If more than half of the dollar value of the creditors accepted the proposal, the proposal was accepted.  However, the student B’s student debt is not discharged because it is six years old, not more than seven.

When your student loans are less than 7 years old, your creditors still receive a prorated share of your consumer proposal payments, just like any other unsecured creditor. However, and this is important, once the proposal is over, they can pursue you for the rest of the money they are owed.

The only exception to this would be if the student loan lender specifically agreed to the discharge of the student loan as a term of the proposal.  If they simply don’t vote, the other creditors can approve the proposal, but the student loan continues to exist.

Using our example above, if $15,000 in credit card debts voted in favour of the proposal, but $10,000 in less than seven year old student loans voted against, the proposal would be accepted, but the student loans would not be discharged. At the end of the proposal, the debtor may still be liable for the student loan debts.

To reiterate: A former student’s student loans, if less than seven years old, will only be discharged in a consumer proposal if the student lender specifically votes in favour of the proposal.

Does that mean you have no option if  your student loans are newer?

No.

If you can’t pay your student debt, a consumer proposal might be the answer.

• If you have significant other debts (like credit card and unsecured bank debt), a proposal will eliminate these debts which can mean that you will now be able to afford your monthly student loan payments.
• You can also ask that your student loan lender agree, up front, to discharge your student loans in full as part of the proposal.  Why would they do this? Well if you are close to the 7 year mark and would otherwise file bankruptcy anyway, and you can offer slightly more as an incentive, they may agree.  You are still better off, and so are they.

If you are strugging with student debt, the key is to talk with a Licensed Insolvency Trustee who can review your personal situation and provide debt relief solutions that will work for you. Contact us today for a free no-obligation consultation.

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As a result of these costs, it shouldn’t be a surprise that students requiring a Canada Student Loan now graduate with more than $28,000 in student debt. And while recent changes to OSAP may make it easier for those in need to access more credit, it may also cause some to take on even more student debt.

We’ve seen the impact student debt can have, firsthand in our firm. Based on our study of student debt, we found that the average student debtor was 36 years old, one in four was a single (lone) parent and 60% are female. The inability to find a job paying enough to allow them to repay their loans and the financial hardship caused by these loans led them to file for insolvency to deal with their student debt.

What can you do if you’re struggling with student debt?

If you are having trouble repaying your student loans, there are solutions that you can look at.

You can try negotiating new payment terms to repay your loans, asking to pay a more affordable monthly amount. Be aware however that this will keep you in debt longer as it extends the length of your loan, making you pay more in interest.

Alternatively, you could see if you qualify for government repayment assistance programs. You may qualify for a reduced monthly payment or partial interest relief however there are conditions and you will still be required to repay your loans.

If your student debt seems to be insurmountable and you have been struggling to pay it off for years, consider meeting with a licensed insolvency trustee.

A Licensed Insolvency Trustee can help you review two student debt relief options available in Canada:

• A consumer proposal which allows you to make an offer to repay a portion of your student debt, along with other debts, based on what you can afford.
• You can consider filing bankruptcy to eliminate student loan debt.

To see if you qualify for either of these solutions, you will need to talk with a Licensed Insolvency Trustee. They will want to know how long you have been out of school, since student debt is only automatically discharged by the Bankruptcy & Insolvency Act if you have been out of school for at least seven years.

They will also want to talk about other debts you owe. Most people we help who carry student debt also have significant credit card debt and often payday loans.  Even if your student debt does not meet the 7-year rule for automatic discharge, it may be helpful to consider filing insolvency to eliminate your other debts making your student loans more manageable especially if those debts charge a very high interest and you are only making minimum payments towards those debts.

Student debt relief is possible, but it is a little more complex than dealing with basic credit card debt. For more information read our student debt help FAQ page.

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Private Student Loans, Student Line of Credit vs Government Student Loans

It is important to know whether your student loan debt is from a government guaranteed student loan program like OSAP or if it’s a private loan from a bank, credit union or other financial institution.

A traditional Canada student loan is guaranteed by the federal or provincial government. Qualification is based on need. You receive funding as you attend school. Interest is not charged on the loan and you are not required to make any payments while you are in school.

A private student loan is not government guaranteed.  It’s a loan you get from a bank and can take the form of a student line of credit, term loan or student credit card. In practical terms, it’s the same as any other bank loan. Why would a bank loan money to a student who is going to school, has no job and is not guaranteed by the government?  Isn’t that a big risk for the bank?  Not really, because the banks typically give student lines of credit to students that have good job prospects because they assume that once you are working you will have the income to repay the loan. They may also ask for a parent to co-sign the loan or provide collateral perhaps in the form of a home-equity line of credit.

Student Loan Repayment Options

When do I have to start making payments on my student loans?

Most recent graduates are eligible for a six-month grace period on Canada student loans during which you do not have to make any payments.  While you do not have to make any payments during this time, you will be charged interest on the Canada portion of your student loans from the day you graduate.  Current Ontario legislation provides you with a payment and interest-free grace period of six months on your Ontario OSAP loans. We recommend you check with your provincial student loan office to confirm whether interest will be charged for your provincial student loans.

Whether you should take advantage of this grace period is up to you, however, the sooner you pay off your student loans, the less you will pay in interest in the long run.  If you are unable to find a job right away or need money to relocate or set up your new living arrangements, it may make financial sense to delay your payments and take advantage of the deferment.

Private loans are another matter. If you have taken out a line of credit from the bank to fund your education, interest is charged as soon as you draw on the loan. You will have already been required to make the minimum monthly payments on student credit cards while you were in school, which is usually interest plus 1 to 5% of the loan balance. If you have a term loan, your student loan provider may have defer principal payments until 12 months after graduation, however you are charged interest on all monies loaned to you from the day they are advanced.

Choosing which loan to pay off first

Financially, you should always pay off high interest rate debt first.

Create a personal budget based on your income and monthly expenses, and determine how much discretionary income you have available to put towards student loan repayment. This will help you make a plan to pay down student debt.

1. If you carry a balance on a high-interest credit card, plan to pay that down right away.
2. If you have student lines of credit keep up with all minimum payments.
3. Prioritize any student loan guaranteed or co-signed by your parents or other family member so your co-signor is not at risk if you can’t pay.
4. Next, focus on making the monthly payments under the standard repayment plan terms of your National Student Loan Service Centre consolidation agreement.
5. You can also make lump sum or extra payments at any time which will be applied to any interest owing first, then to the principal. Review your budget for any discretionary income that can be applied towards your student debt to pay it off sooner.

The dangers of paying off government Student Loans with private loans

Student debt consolidation is not generally recommended in Canada. A consolidation loan repays an old debt and replaces it with a new debt. A student debt consolidation loan would be new debt, and as such is no longer technically a student loan. There are negative consequences of converting government guaranteed student debt into private student debt:

1. If you have government guaranteed student loans, your current interest rate is likely lower than any student debt consolidation loan.
2. Converting government guaranteed student loans to a private debt consolidation loan will eliminate any student debt tax benefits (interest on eligible student loans is a non-refundable tax credit).
3. You will also no longer qualify for any government repayment assistance program.
4. Banks and financial institutions in Canada are unlikely to approve a consolidation loan for student debt.
5. If you cannot afford your low interest student loan payments, you likely cannot afford a consolidation loan.

A consumer proposal is often a more viable mechanism to consolidate old debt, including eligible student loans, into one monthly payment if you cannot afford to repay your loans.

Implications of failing to repay student loans

Falling behind on your student loan payments will have a negative affect on your credit score. Both Canada student loans and private lenders will report late payments and accounts in collection to the credit bureaus.

If you do not make the required loan repayment on a student lines of credit or credit cards the bank can apply to the court to garnish your wages. Failure to pay off co-signed student loans will result in your student loan servicer or lender looking to your co-signor to pay off the loan. If you don’t make your required payments the government has the power to take your tax refunds.  Both federal and provincial governments have the power to garnishee your wages without going to court.

If you are having trouble keeping up with your Canada student loans you can apply for a revision of terms, which will allow you to lower your monthly payment and extend the length of time it will take to repay your loan up to a maximum of 15 years.  You can also see if you qualify for income-based repayment adjustments through the federal Repayment Assistance Program.

How to Get Help Paying Off Student Loans

What happens if you ultimately can’t meet your student loan payment obligations? Almost one in five insolvencies in Canada each year involve student loan debt. You are not alone in considering student debt forgiveness programs like a bankruptcy or consumer proposal.

In terms of student debt forgiveness options, there are differences between the treatment of Canada student loans and private lines of credit.

Government guaranteed student loans are covered by special rules under the Bankruptcy & Insolvency Act. A government guaranteed student loan is only automatically discharged in a consumer proposal or bankruptcy if you have “ceased to be a student” for over seven years.

A student line of credit, however, is a private loan between you and the financial institution, and as such, is treated like any other debt. If it is an unsecured loan (in other words the bank gave you a line of credit and did not ask for any type of collateral), then these loans would be eliminated if you declare bankruptcy or file a consumer proposal with no waiting period. If you graduated two years ago and declared bankruptcy today, your student line of credit would be eliminated by your bankruptcy just like any credit card debt you have.

If you cannot afford to pay your student debt on your own, have been out of school for 7 years or have significant other debts, use our debt repayment calculator to estimate what your payments might be in a consumer proposal.

If someone co-signed your student line of credit, then your bankruptcy will not eliminate their obligations under the terms of the loan agreement; your bank or credit union will pursue your co-signer. Similarly, if you provided any security for the line of credit, then any secured debt remains — it is not forgiven in a bankruptcy.

We cover these topics and more in our student debt help FAQ page.

Which form of student debt relief you need will depend on your situation, including which type of student debt you carry, how long you have been out of school and what other types of debt you may have. If you are struggling with student debt, contact your nearest debt help location for a free consultation. We’ll explain all your options and help you make a plan to eliminate your debt.

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