How Do Student Loans Work in a Consumer Proposal?

Student loan debt is a growing problem in Canada. It takes the average new graduate 9.5 years to repay their student debt, and across the country, the average Canadian finishes school owing around $26,000. As they enter a job market with fewer full-time, well-paying positions, making loan repayments can be tough.

 

Given how long it can take to pay off those loans, it should be no surprise that many individuals who wind up amassing unmanageable debt from other sources also still have student loans. What happens to your student debt when you work with licensed bankruptcy trustees (now known as licensed insolvency trustees) to find a repayment plan?
 

How Old Is Your Student Debt?

 

If it has been at least seven years since you were a full or part-time student, you may be able to include student loans in a consumer proposal and have them partly erased. However, if it’s been less than seven years, you will likely not be able to include them in your consumer proposal. This can complicate your path toward debt freedom.

 

This does not apply to loans made by a private bank, such as a student line of credit, or loans not guaranteed by the provincial or federal government. There is no waiting period for these loans.

 

What Happens to Student Loans Not Included in a Consumer Proposal?

 

A consumer proposal is an alternative to bankruptcy in which some of your unsecured debts are erased and you make fixed monthly payments to a trustee, who then distributes it to all of your creditors. If a majority of your unsecured creditors accept the proposal, it becomes binding for all of them – except in cases where those debts are ineligible, such as student loans.

 

However, during a consumer proposal or bankruptcy, you may be able to stop making payments on your loan. During this period, interest does continue to accumulate. It’s advisable to continue making payments if you can afford it, even if you are only paying down the interest. Otherwise, the loan can become overwhelming by the time you’ve paid down your consumer proposal or been discharged from bankruptcy. A consumer proposal can last up to 5 years, which is a long time to allow a student loan to accumulate interest without paying any of it down.

Keep in mind that a consumer proposal may still make sense even if the student loans will survive. If you have a significant amount of non-student loan debt, that debt can be dealt with through the proposal leaving you better able to manage the student loan debt going forward. The student loans will also receive some payments from the proposal thus reducing the remaining amount to be paid.

 

Credit Counselling to Repay Student Loans

 

If you are facing insurmountable debt and a large portion of it is taken up by student loans that are ineligible for relief, you may have to look beyond bankruptcy or consumer proposals to manage your payments. You could look into credit counselling to help you stay on track and avoid the insolvency process altogether. It may be more expensive and take longer, but if your loans are ineligible for relief, it may be one of the few options available to you.

 

There are several types of services called credit counselling that you should be aware of. It may refer to debt management firms or professionals who offer to make new payment arrangements with your creditors. These arrangements are voluntary for your creditors, and the firms or individuals who offer them differ substantially from licensed insolvency trustees in that they:

 

  • Cannot legally stop collection efforts such as phone calls or legal actions like wage garnishment from creditors;
  • Cannot legally bind your creditors in a debt settlement agreement;
  • Are not subject to government oversight, federal licensing, or independent regulations;
  • Are not required to advise you of all your options for debt relief, and in fact may not have the education to do so.

 

Individuals who come to Debt Help BC for help all receive credit counselling advice. As part of your initial assessment, a licensed insolvency trustee will detail the options available to you and which options may best fit your financial situation, including a consumer proposal or bankruptcy. If student loans that are still ineligible for relief make up a major part of your debt burden, it may make sense for you to avoid bankruptcy and find another way to make loan repayments.

licensed bankruptcy trustees
 

Tips for Repaying Student Loans

 

If your student loans are ineligible for forgiveness, but you’re struggling to make payments, you may have to look into alternative plans to get ahead. Consider some of these tips for paying back student loans faster.

 

#1 Look into Repayment Assistance

 

The federal government provides repayment assistance programs that make it easier for past students to repay their loans. You may be able to enjoy reduced monthly payments.

 

#2 Use Windfalls to Pay Back Debt

 

This is a good strategy for repaying any kind of debt. The next time you enjoy a windfall, whether that’s a raise, cash gifts, or any form or extra money, put it directly toward repaying debt as a one-off payment to make a dent on your balance.

 

#3 The Hardship Provision

 

If debt relief is truly your only path out of debt, a student loan that is five or more years old may be discharged under the Hardship Provision. This provision may apply if the court finds that you acted in good faith with your obligation to repay your student loans, and that you have experienced and would continue to experience financial difficulty paying back student loan debt.

 

Can You Get a Student Loan While in a Consumer Proposal?

 

One common problem faced by people in insolvency is qualifying for credit under a consumer proposal. It is generally inadvisable to take out a new loan while you are already in a consumer proposal, but there are exceptional circumstances.

 

Returning to school or taking a couple of retraining classes can be a good way to get a fresh start after initiating a consumer proposal or bankruptcy, especially if job loss or loss of income was part of the reason you went into debt to begin with. As long as student loans were not included in your consumer proposal or bankruptcy, you are likely still eligible for government-guaranteed student loans to go back to school and retrain.

 

Student loans can complicate the insolvency process, but a licensed insolvency trustee can walk you through all of the implications and explain how they will affect your long-term financial health, and your best options for dealing with them.