Student loan debt levels have been rising across Canada for decades, and it’s putting graduates in a precarious position. In British Columbia, the average student debt has risen to $30,000 at graduation, an increase of 88% since 1999. It’s a significant amount of debt, and many students take it on before they have any proven earning potential.
In 2017, the BC government eased interest rates on the provincial portion of student loans. Nevertheless, they still charge the prime rate, and there is still the federal portion of the loan. Even with a bit of relief on interest rates, it’s easy for students to get into too much debt. Students are often put in a position where they have to borrow large sums of money at a young age and have no clear plan for paying it back. Many graduates later in life are forced to push back other financial goals like homeownership and saving for retirement for years as a result. It takes a long time to pay off these loans, and when they’re compounded with other types of credit, they can quickly make a financial situation impossible to manage.
A common question we hear as licensed insolvency trustees on Vancouver Island is whether or not student loans can be included in a bankruptcy or consumer proposal. The answer is not simple.
Student Loans in a Consumer Proposal
The short answer on student loans and consumer proposals is that it depends on how long you’ve had the debt. You must wait at least seven years since you were last a full or part-time student before student loans can be included in a consumer proposal or bankruptcy and be partially forgiven. If that’s the case, you can learn more about consumer proposals works further down.
If not, there are repayment assistance programs offered by the BC government that you should explore. These range from programs in which you can have debt forgiven by working in an underserved community with in-demand training to debt management programs arranged to help you meet your monthly payments.
You can also talk to credit counsellors and licensed insolvency trustees in BC about relief for other types of debt. If you can’t keep up with debt payments, settling other types of loans can give you more breathing room.
Exceptions to the Rule
Not all types of student loans are protected from consumer proposals and bankruptcy. Only loans guaranteed by the provincial or federal government are protected from debt relief. There is no waiting period for lines of credit issued by a bank or another lender.
A student line of credit is usually more expensive than a guaranteed loan from StudentAid BC, and you have to pay off the interest on a month-to-month basis, rather than waiting until you have completed your degree. However, you don’t need to prove financial need, and it’s often a good solution for part-time students. While banks do not offer repayment assistance, they can be included in consumer proposals and bankruptcies.
How a Consumer Proposal Works
One of the most common questions we get asked is: what is a consumer proposal? It is an alternative to bankruptcy in Canada and a way to negotiate a debt settlement with unsecured creditors such as credit card lenders, banks, and the Canada Revenue Agency. A student loan is also unsecured credit. If more than seven years have passed since you were last in school, that loan can also be included in a consumer proposal.
With the help of a licensed insolvency trustee, you offer a fixed monthly payment to all of your unsecured creditors at a reduced amount. In some cases, this amount can be as little as 20 to 30% of the outstanding debt, although this depends on your individual situation.
Your creditors may refuse your offer, in which case you may have to revise the monthly payment you’re willing to contribute or turn to bankruptcy. Creditors vote on consumer proposals with votes weighted by the amounts owed. However, if creditors who are owed 50% plus one dollar of your total debts accept the proposal, all creditors are bound by the agreement.
In addition to reducing your total debt owing, a consumer proposal also stops interest charges and collection actions, giving you the time that you need to pay back your debts.
How Bankruptcy Works
Although consumer proposals work effectively for people who want to protect their assets and who earn a steady income, they are not always the best solution for dealing with student loans. People who still have large student debts are less likely to own homes or have investments or savings that aren’t protected by bankruptcy proceedings.
If you’re asking what is personal bankruptcy and is it right for you, look no further. These are some of the circumstances in which personal bankruptcy is a better option than a consumer proposal:
- You have little to no income and cannot afford to make regular payments to your creditors.
- You have an irregular income (such as working as a freelancer or working for tips), and you’re not sure you can make regular monthly payments.
- You do not have significant unprotected assets. In British Columbia, there is a substantial list of exempt assets, including up to $12,000 in home equity (in Victoria and Vancouver; $9,000 in the rest of the province) and RRSP investments except for those made in the 12 months prior to filing.
If you earn over a certain amount, you will have to pay some of that surplus income to your creditors until you are discharged from bankruptcy, but that will last 21 months rather than up to five years.
Get Help with Student Loans
Student loans can be a significant burden and hold you back from your dreams and goals. There are ways you can get help paying them back. Give us a call for a free consultation, and we can explore your options to get debt-free.