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Student Debt

Student debt is treated differently from other debts in a consumer proposal or bankruptcy.

   

Initial situation

Benjamin finished his university studies in industrial relations 5 years ago. Since then, he has had a hard time finding regular work in his field. When he completed his degree, he had taken out $36,000 in student loans, which he started to pay back right away. Today, he has $28,000 in student loans, but they would be down to $20,000 if he had been able to make regular monthly payments. In fact, periods of unemployment have made it hard for him to balance his budget. He can’t help but feel that whenever he takes one step forward, he ends up taking two steps back.

Previous job’s gross salary 51,000$/year
Car loan 300$ per month,18,000$ balance
Credit card 800$

 

Benjamin lives in an apartment and does not spend money excessively, but he was feeling discouraged by his job insecurity and overwhelmed by his student loans, especially when he was unemployed.

Issues

A student loan is granted by a financial institution but secured by the Government of Quebec. With a variable interest rate that is now at 4.45% (and 3.5% when he finished his studies), it is very advantageous compared to a regular loan, which can cost between 8% and 12% in interest. Also, as long as one is in school, the government pays the interest.Finally, rather than having to pay the loan back in 5 years, the government lets you take at least 10 years to repay it.

Because of these special measures, Benjamin’s loan costs him $372 per month instead of $730$. So, it’s easy to understand why the law doesn’t treat this debt the same way as regular debt when you’re making a consumer proposal or filing for bankruptcy. The government is effectively providing financing to a student who doesn’t have an income, at very advantageous conditions so that they can acquire an asset (their diploma), which will hopefully serve them throughout their career.

Proposed solution

You can’t eliminate a student debt if you decide to file a bankruptcy or consumer proposal within 7 years of completing your studies. However, after 7 years, if you’re unable to meet your obligations, you can file a proposal or bankruptcy and include the student loan, like you would any other debt. This way, for at least 7 years, borrowers must make an effort to find a stable job to reimburse their loan.

That being said, sometimes people are not able to complete their studies or there are little or no job prospects in their field. If this is the case, student loans can create financial hardship. 

In these situations, the government has somewhat softened certain rules, allowing a person who files a proposal or bankruptcy less than 7 years after completing their studies to ask the court to eliminate the debt. This request can be made 5 years after they have completed their studies. The person must show that they have made serious efforts to pay their student loan but that they will be unable to pay in the near future. 

In Benjamin’s case, if he decided to file a proposal or a bankruptcy, the student loan would not be automatically discharged because he finished his studies less than 7 years ago. But if he filed, he would be able to ask the court to free him from this debt. However, courts can be very demanding and, because Benjamin is finding some work in his field, he would probably not meet the requirements.

Debt consolidation is also not an option for Benjamin for three reasons:

  • If a financial institution gives him a loan, they would lose the gouvernment’s guarantee.
    The goal of consolidating debt is to reduce the interest rate. But interest on a consolidation loan varies between 12% and 14%, so it’s almost three times higher than a student loan.
    Benjamin has a debt ratio of 38%, so it’s under the acceptable threshold of 40%, but he does not have a stable job, which is something that the financial institution would require.
  • We worked hard with Benjamin to improve his budget and identify unnecessary expenses that he could reduce or eliminate. And instead of making higher payments for his student loan in times of employment, we explained to him that it would be better to save the extra money and use it during periods of unemployment. This way, he will avoid a bad credit rating caused by late payments
  • If his job situation doesn’t improve by 2022, he could consider making a consumer proposal or filing for bankruptcy, depending on the circumstances. In fact, 7 years will have elapsed since he finished his studies, and the student loan can be treated as any other debt.

At least Benjamin now knows what to expect, what his rights are and how he needs to control his spending to maintain his standard of living under the current limits. If his situation does not improve in 2 years, he knows there are other solutions available to him.

Conclusion

Student debt is unlike other kinds of debt. Before making a decision, it’s important to be informed and know what your options are. In certain situations, if you can’t include your student debt in a proposal or bankruptcy and you have other kinds of debt, eliminating or reducing your other debts through this process could be beneficial because it allows you to put all your efforts into paying off your student loans afterwards.