Student loans can be a significant burden long after you graduate. Keeping up with your payments can be demanding, especially with the rising cost of living across Canada.
According to the most recent survey by StatsCan, the average student debt owed in 2015 at the time of graduating with a Bachelor’s was $28,000. There’s no doubt this figure has climbed since then, with students facing even higher debt loads.
Staying current with your student loan payments can be challenging if you’re on a tight budget. However, giving up on them can lead to devastating consequences. As with other unsecured debts, if you default on your payments, your student loan can end up in collections in Canada.
In this article, we’ll explain how your student loans can end up in collections and the legal and financial consequences you can expect. We’ll also cover steps you can take to stop collection efforts and resolve your student loan debts.
What Does It Mean to Have Student Loans in Collection?
When your student loans are in collections, it means that your original creditor has passed the debt off to a debt collection agency. These are companies that specialize in collecting unpaid, unsecured debts. They may purchase the debt from your creditor, usually for pennies on the dollar. Or, your creditor may hire them to recover the debt on their behalf for a commission.
Debt collection agencies use a variety of tactics to collect unpaid debts. Typically, these include frequent calls and written notices about your overdue payments.
Luckily, there are laws in Ontario that restrict when and how often debt collectors can contact you. However, if you want the collection efforts to stop for good, you’ll have to do one of three things:
- Pay off the debt
- Negotiate a payment plan
- File for bankruptcy or a consumer proposal
If you’re receiving collection calls that you want to stop, now may be the time to seek help from an Ontario Licensed Insolvency Trustee. At David Sklar & Associates, a Licensed Insolvency Trustee will review your situation and recommend the best solution for your debt problems.
The four types of student loan collections in Canada
Student loans in Canada originate from various creditors, each of whom has different standards for when and where they send a debt to collections.
The most notable creditors are the federal and provincial governments, which issue the bulk of student loans in Canada. Private lenders also provide student loans, usually in the form of a student line of credit or credit card. And there are circumstances where you may owe money to a university or college.
Below is an overview of how these creditors approach student loan debt collections.
OSAP (Ontario Student Assistance Program) student loans
When you stop making payments on OSAP loans, your account is sent to a collection agency after 270 days. OSAP usually relies on a small number of agencies to recover the amount owed.
Private student loans
Private financial institutions, like banks, send past-due debts to their in-house collection department or a third-party agency. Unlike the provincial or federal government, many private lenders have the resources to pursue collection actions independently.
Often, private student loans have to be co-signed by a parent. If you default on your payments on a signed loan, the issuer can pursue the co-signer to recover the debt.
University and college student loans
Post-secondary institutions rarely issue loans. Still, you may find yourself owing tuition, fees, residence charges, or other costs to the school you attended.
Suppose you owe your university or college any funds after graduation. In that case, they might withhold your degree until you repay what you owe. Alternatively, they may also send your account to a collection agency.
Federal student loans
In Canada, most government-supported student loans are financed partially at the federal level. This feature applies in Ontario, where the federal government provides a significant portion of your OSAP loan.
While the Ontario government sends the provincial portion of your loan to a private collection agency, the federal portion goes to the Canada Revenue Agency (CRA). Usually, the federal government will begin collection efforts through the CRA if you’ve missed payments for nine months.
What powers do creditors have to collect on your student loans?
Non-government creditors, including debt collection agencies, can legally garnish your wages or withdraw money from your bank account to recover unpaid student loan debt. However, they’ll only pursue legal action if the amount you owe is significant enough, as getting a court judgment can be costly. In addition, they may only garnish up to 20% of your wages.
The CRA has much more widespread collection powers than a typical debt collector. It can freeze your bank account or garnish your wages without needing to obtain a court judgment against you. Unlike a private lender, the CRA can garnish up to 100% of your wages.
In addition, the CRA can withhold tax credits and government benefits you would ordinarily receive. For example, it can keep your income tax refund or GST refund and apply them against your student loan balance.
If your financial situation is dire, you may seek out CRA debt forgiveness and CRA debt relief options. Unfortunately, CRA debt relief programs are limited, and the CRA will never forgive debt through negotiation.
However, the CRA is beholden to bankruptcy proceedings and consumer proposals. As a result, it’s possible to have debt in collections with the CRA forgiven by those means. But it’s crucial to remember that the CRA will not voluntarily dismiss any money you owe them.
Student Loan Collections and Your Credit Report
Governments and private lenders report student loan payments to Canada’s credit bureaus. As a result, any late and missed payments you make will appear on your credit report and remain there for six years. Unfortunately, that doesn’t bode well for your credit score.
Your payment history shapes a significant part of your overall credit score, so a slew of missed student loan payments will cause it to drop. With a low credit score, it’ll be more challenging to qualify for a mortgage, find an apartment, and even apply for a credit card.
Debts that go to collection receive an R9 rating, the most severe remark that can appear in your credit history. It will only serve to erode your credit score further.
Tips for keeping your student loan debt out of collections
Below are some tips that can help ensure your student loans don’t end up or remain in collections.
Apply for the Repayment Assistance Plan (RAP)
Are you currently up to date with your student loan debt but find it tough to keep up with payments? If so, consider applying for the Repayment Assistance Plan (RAP), a financial relief program the federal government offers.
The RAP can ease your debt burden by reducing or eliminating your monthly student payment. The government will cover your interest charges during the program’s first five years, so you’ll only be responsible for paying the principal. After this period, they’ll also begin covering a portion of your principal. Depending on your financial situation, your total payments may drop to zero.
RAP has three criteria your must meet to apply:
- You must be a Canadian resident
- Your student loans must be in good standing
- Six months must have passed since you left school
The government will evaluate your income, household size, and ability to repay your debt to determine your loan reduction amount.
What if your student loan account is already in collections? In that case, you’ll need to catch up with your payments before applying for RAP.
Make a payment arrangement with your creditors
Your creditors are keen on collecting as much of your student loan debt as possible. Therefore, it’s always worth contacting them and proposing a revised payment plan.
Let’s assume the federal portion of your student loan is currently in collections with the CRA. In that case, contact them as soon as possible to see if you qualify to have your account brought back into good standing. You’ll typically need to enter into a payment arrangement with the CRA, where you make the equivalent of at least two regular monthly payments. Once your account is current, you can apply for RAP to lower your debt burden further.
You’ll need to contact your province student aid office for the provincial portion of your student loan. For example, you’ll need to contact OSAP to deal with Ontario student loans.
For private student loans, you’ll need to contact either the financial institution that issued them or the collection agency to which your account was assigned.
Enroll in the Ontario Loan Rehabilitation Program
In addition to the RAP, financial relief for student loan debt is also available at the provincial level. If your account is already in the hands of a private collection agency, consider enrolling in the Ontario Student Loan Rehabilitation Program.
If you qualify, you’ll have the opportunity to select a rehabilitation plan that fits your budget. Plan options range from two to six months and include all outstanding interest. Payments are made monthly.
Notify the private collection agency in charge of your account of your intention to enroll in the program. They’ll review your eligibility and send you an application package based on your desired plan if you qualify.
File for bankruptcy or a consumer proposal
In Canada, filing for insolvency is the surest way to halt student loan collection efforts. Insolvency involves one of two processes: a consumer proposal or bankruptcy. Both offer legal protection from your creditors under the Bankruptcy and Insolvency Act.
When it comes to student loans and consumer proposals, there are several benefits to filing one:
- You can include other unsecured debts in addition to private and government student loans.
- Student loan collections will stop immediately, as will wage garnishments and other legal actions by creditors.
- Your new repayment plan considers your expenses and income, so you can rest assured your monthly payment will be affordable.
- You can spread your monthly payments over five years.
- Your proposal can significantly reduce the total amount you owe, potentially up to 80% of the principal.
Student loans are treated similarly under bankruptcy. By filing for bankruptcy, you’ll receive the same protection from creditors as through a consumer proposal. Plus, you’ll be able to eliminate all (or most) of your unsecured debts.
When can you include your student loans in bankruptcy or a consumer proposal?
Both bankruptcy and a consumer proposal can help clear your unsecured debts, including student loans. However, you cannot write-off government student loans unless:
- It’s been more than seven years since you were a full-time or part-time student, or
- You qualify for the “hardship provision,” which can shorten the waiting period from seven to five years.
This 5 to 7-year waiting period prevents recent graduates from immediately declaring bankruptcy or filing a consumer proposal on their student loans. Luckily, it doesn’t apply to private student loans, which are automatically dischargeable under a consumer proposal or bankruptcy.
Because of these time constraints, exploring other ways to pay off your student loans is wise.
Getting out of student loan debt may be challenging, even frustrating. But taking control of the situation and finding a way to manage it will give you more control and options than if it’s in the hands of a collection agency.
At David Sklar & Associates, our passionate and experienced team of Licensed Insolvency Trustees can help you explore your debt relief options to resolve your student loans. Contact us today for a free consultation – you owe it to yourself!Contact David Sklar