What happens when you can’t pay off your student debts?
Saturday, Aug. 30, 2014
Clarissa Dimaapi is the youngest of six siblings, all of whom are or were responsible for putting themselves through university. So she always expected to take out a student loan to fund her own education.
“We’re all in the same boat,” says the 22-year-old Winnipegger who lives at home with her parents. She now has about $15,000 in outstanding student debt. “If I didn’t get a loan, I wouldn’t be able to go to school.”
A recent CIBC survey suggested that 51% of Canadian students will have to borrow money to pay for tuition, living expenses and books. But when people take on that loan, many don’t put much thought into what to do when it’s time to start paying it back. What will the payments be like? And more importantly, what happens if you can’t pay?
Defaulting on your student loan may seem like a worse-case scenario but it’s a reality for tens of thousands of people each year; the key is understanding how to get yourself out of trouble and how to apply for relief from the government before you ever fall into the dreaded default position.
The Canadian Federation of Students estimates that the average student in Ontario and Nova Scotia graduates owing $28,000 to the government. “I fear that with students graduating with significant amounts of debt and the precarious job market, we could find more students in extreme situations,” says Jessica McCormick, national chairperson of the Canadian Federation of Students.
The government provided $2.4-billion in Canada Student loans to about 447,000 full-time students from 2011 to 2012. The loans are typically scheduled to be repaid over a 9.5-year period (borrowers can extend the payment period to a maximum of 14.5 years).
In recent years, about 30% of borrowers paid off their loans within three years. But the default rate on Canada Student Loans was 13% from 2011 to 2012, which the government says is an all-time low. Last year, the federal government said it would write off $173-million in unpaid student loans in the coming fiscal year. In the U.S. President Barack Obama recently ordered the department of education to expand a program to ease student loan repayments for about five million more people.
So when do you have to start paying the money back?
If you have a Canada Student Loan, six months after you stop being a student, you have to start paying it back (so your first repayment is at the end of the seventh month after leaving school). You won’t have to make a payment but interest will start building up during this time. (In some provinces such as Alberta and Ontario, interest does not accrue on the provincial portion of your loans during the six-month grace period.) But throwing money at your student loans during this period is an ideal strategy because payments are applied directly to your principal.
If you’re behind in your monthly payments, your Canada Student Loan is considered to be “delinquent,” which sounds like your loan is skipping third period and spray-painting the school with a cigarette dangling from its mouth. If your loan is in delinquency for longer than 90 days, you can’t access the government’s all-important Repayment Assistance Plan (RAP).
If you have difficulty making your loan payments — a University of Western Ontario survey suggested that 75% of those who default earn less than $20,000 a year — apply for repayment assistance. The government can reduce your monthly payment in accordance with your income, forgive interest on the loan and in some cases waive payments against the principal. Of the almost 185,000 people who applied to the program in 2011 to 2012, 90% were excused from making any payments, at least for a time.
The important thing to remember here is that you have to apply for assistance before you get into serious trouble. Once you’re 90 days behind in your monthly payments, you can’t apply and you certainly can’t apply if you’re in default.
Your loan is considered to be in default you haven’t made any payments on your loan in 270 days or nine months, and it is sent to the Canada Revenue Agency for collection. The agency will come after you for the money owed, including drawing from your GST and income tax refunds. It can also initiate legal action and
garnish your wages.
As for the provincial portion of your loan, the practices vary from province-to-province when you get into trouble. Loans at the B.C. Student Loan Service Bureau are considered in default if they are 150 days overdue.
Your Ontario Student Loan is considered to be in default after being in arrears for 270 days and the Ontario Ministry of Finance could eventually turn to private collection agencies to recover the money. You’ll be reported to a credit bureau and it could affect your ability to get a car loan, mortgage, credit card; it could affect your ability to rent an apartment or to get a job. You could be ineligible for further student loans. Your income tax refund could be withheld and meanwhile, interest will continue to build on the unpaid balance.
That list of consequences wasn’t meant to incite terror; it is possible to find your way back from a worse-case scenario.
We could find more students in extreme situations
Well, except in Ontario. The only way to return to “good standing” with your Ontario student loan after you’re in default is to pay off the balance in full. “In an effort to further assist students, the ministry is working diligently on improvements to the debt rehabilitation process. We hope to have an announcement ready by the end of the year,” a spokesperson for the Ontario Ministry of Training, Colleges and Universities said.
But with regards to a Canada Student Loan in default, you can get your loan back from the CRA with rehabilitation, which sounds like your loan is doing planks with an exercise ball. To rehabilitate your Canada Student Loan, you have to arrange a repayment schedule with the CRA and repay all of the interest owed. After making the equivalent of two monthly payments on the loan, your loan could return to the National Student Loans Service Centre; you will once again be in good standing and be eligible for loans, grants and repayment assistance through the government.
You can declare bankruptcy but your student loans won’t be discharged until seven years after you’ve left school. “There is an exception to that,” says Gene Frendo, a bankruptcy trustee at BDO. “If it’s been five years, you can to apply to the court to ask that a special situation be considered, for example, somebody who became disabled or for whatever reason can’t work.”
But again, before you get into a default situation, ask for help. Ms. Dimaapi applied for repayment assistance in December online.
She had taken some courses at the University of Manitoba and then a six-month health care aide program at Robertson College, paying almost $7,000 so she could work and make more than minimum wage while pursuing school. But when she completed those studies, she had to make payments on her loans. Her Canada Student Loan was about $10,000 and her monthly payment was $118; meanwhile, her Manitoba student loan was almost $5,000 and her monthly payments were $55. But although she had occasional work as a childcare assistant at a daycare and graveyard shifts as a health care aide, she ran into trouble.
“I had my Manitoba and national student loans and my credit card [bills] and it was getting difficult to keep track,” she says. “I wasn’t getting a lot of shifts at the time when I had to start paying my loans.”
She has to reapply for repayment assistance every six months. But doing so allows her to access more student loans, which she’ll likely need. After being on a waiting list for three years, she has finally been accepted at Red River College’s nursing program. The program, including tuition and books, is expected to cost another $28,000 so she is deferring studies until next year so she can work and save more money. Lucky for her, once she is a full-time student again, she won’t have to make any payments to her student loans and interest stops accumulating.
“My brother is a nurse. He graduated a few years ago and he had put himself through school. He stopped for a year to work and then went back to school. I learned that if [my siblings] are able to achieve it and pay off their own debts, then I can do it too. And for me, knowing that I pay for my own school is a good feeling.”
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Illustration by Chloe Cushman, National Post