When Your Student Loan Is in Collection

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Student loans can be a significant burden long after you graduate. Keeping up with your repayments can make it feel like getting ahead is simply impossible, especially as the cost of living rises rapidly across Canada.

According to the most recent survey conducted by StatsCan, the average student debt owed at the time of graduating with a Bachelor’s was $28,000 in 2015, a number that has almost certainly increased as students face higher living expenses and tuition.

Keeping up is no easy task, but giving up on your payments can lead to even more devastating consequences. As with other unsecured debts, failure to keep up with your payments can end up with your student loan in collections in Canada.

What Does It Mean to Have Student Loans in Collection?

When your student loans are in collection, it means that the 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 the original creditor, usually for pennies on the dollar, or they may be hired by the original creditor who works for a commission.

Debt collection agencies use a variety of tactics to collect. They may start with frequent calls and written notices about your overdue payments. There are limitations on when and how often debt collectors can contact you in Ontario, but if you want them to stop contacting you for good, you will have to:

  • Pay off the debt
  • Negotiate a payment plan with the agency
  • 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 Ontario Licensed Insolvency Trustees. In a free consultation with David Sklar & Associates, a Licensed Insolvency Trustee will review your situation and help you find the best solution to your debts.

4 Types of Student Loan Collections in Canada

Student loans can come from different creditors in Canada: the federal government, the provincial government, and private lenders, who may issue a student line of credit. There are also circumstances where you may wind up owing money to the university or college directly. They each have different standards for when and where they send a debt to collections.

OSAP Collections

When you stop making payments on OSAP loans, the debt is sent to a collection agency after 270 days. OSAP usually relies on a small list of agencies for student loan collections.

Private Loan Collections

Bank loans or student lines of credit may be sent to the bank’s in-house collection department or to a third-party agency. Unlike the provincial or federal government, many banks do have the resources to pursue their own debts.

Often, private student loans have to be co-signed by a parent. If you fall into arrears on a co-signed loan, the issuer can pursue the co-signer to collect in your stead.

Owing Your University or College Money

While post-secondary institutions rarely issue loans themselves, you may find yourself owing tuition, fees, residence charges, or other costs that you would have had to pay the school. If you owe your university or college any funds after graduation, they might withhold your degree until you pay. Alternatively, they may also send the debt to a collection agency.

CRA Collections for Student Loans

In Canada, there is a federal portion to most government-supported student loans. In Ontario, a significant portion of your OSAP loan is actually issued by the federal government. While the government of Ontario would send your amount owing to a collection agency, the federal portion can be sent to the Canada Revenue Agency (CRA), which has much more widespread collection powers. They typically wait until you have missed payments for nine months before pursuing collection actions.

Non-government creditors, including debt collection agencies who have purchased student loans or been hired by student loan issuers, must sue in court to garnish your wages or your bank account. If the amount owing is significant enough, they may do this to collect directly from your employer or bank, but it can be costly to do so. In addition, they may only garnish up to 20% of your wages.

The CRA has the power to freeze your bank account or garnish your wages without having to get a court judgment against you. They can garnish up to 100% of your wages, and in addition, they can withhold tax credits and government benefits you would ordinarily receive. For example, the CRA can keep your income tax refund or GST refund to pay for overdue student loans.

This may put you in a position where you are looking for CRA debt forgiveness and CRA debt relief. Unfortunately, CRA debt relief programs are fairly limited, and the CRA will never forgive debt through negotiation. The CRA is beholden to bankruptcy proceedings and consumer proposals, and you can have debt in collections with the CRA forgiven by those means, but the CRA will not voluntarily forgive any funds owed.

Student Loan Collections and Your Credit Report

Late and missed student loan payments will show up on your credit report, as with any other debt. These missed payments will likely lower your credit score, which can make it harder to find an apartment, qualify for a mortgage, or even get an auto loan or credit card.

Late and missed payments remain on your credit report for six years. Debts that go to collection get the lowest rating (R9) and could significantly impact your credit score.

Six years is also how long it takes the credit bureaus to stop reporting bankruptcy from the date of discharge. A consumer proposal will be removed from your credit report three years after you make the last payment. If you file for bankruptcy or a consumer proposal, you may want to keep track of your credit history to make sure it’s removed in a timely manner.

Student Loan Collections After COVID-19 Relief Comes to an End

During the COVID-19 pandemic, there were a number of relief measures put in place to help keep student loans out of collection. These relief measures included a six-month freeze on repayments and relief from interest charges.

They were a necessary reprieve for recent graduates entering the workforce at a time when many companies were shrinking, and businesses were closed down. Many were unable to work or had their hours reduced.

However, there was no student loan cancellation after COVID-19, and with the end of relief measures, many still find themselves unable to keep up with student loan repayments.

There are assistance plans that can help, such as OSAP repayment assistance, which can reduce the monthly amount you have to pay based on your family income. This can change as your income increases, and if your income is too low, you may be reprieved from making payments at all until your circumstances change.

Stop Collection Actions with Insolvency

When your debt is in collections, only filing for insolvency provides legal protection against actions such as wage or bank account garnishment. Insolvency involves one of two processes: a consumer proposal or bankruptcy.

When it comes to student loans and consumer proposals in Canada, there are several benefits to filing one:

  • You can include other unsecured debts in addition to your student loan.
  • Student Loan collections including garnishments and legal actions will stop.
  • You propose a payment plan that takes into account your expenses and income so that you can afford to make payments.
  • Your repayment plan can take up to five years and may include a substantial reduction in the total amount that you owe.
  • In cases of government issued student loans, if your student loan is more than 7 years after you were last a full-time or part-time student then it will be fully settled by the consumer proposal.

As for student loans and bankruptcy, it may be preferable to go the bankruptcy route if you do not own many non-exempt assets. In bankruptcy, rather than propose a payment plan, you may have to sell certain non-exempt assets in order to pay your creditors. Many people discharging their student loans through bankruptcy do not have much in the way of non-exempt assets, and it may prove better for them financially than a consumer proposal. This is often not the case for those who are more financially established and may have significant assets, such as home equity or non-exempt investments.

When Can You Include Student Loans in Insolvency

Although bankruptcy or a consumer proposal can help clear your debts, government issued student loans cannot be fully written off by the process until seven years after you were last a full-time or part-time student unless you also qualify for the hardship through a court application, which can shorten the limitation to only five years. This limitation prevents recent graduates from filing bankruptcy on student loans immediately.

Because student loans are subject to time constraints before they can be included in insolvency, you may also want to talk to someone about finding other ways to pay off all of your student loans. There may be assistance programs you’re unaware of or other ways to manage your debt and get out of collections.

Getting out of student debt may not be easy, but taking control of the situation and finding a way to manage that debt will give you more control over your financial situation than having student loans in collection. Talk to a Licensed Insolvency Trustee about your options for dealing with what you owe.

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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