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Over the last year and a half, the federal government in Canada has introduced a raft of relief measures to support individuals and businesses impacted by the COVID-19 pandemic. Unprecedented circumstances have put unique financial pressures on millions of people in the country, and as much support as there has been, for many, it’s felt like it simply wasn’t enough.
In the last two years, recent graduates have walked into a turbulent job market. While there are signs of improvement as vaccination efforts ramp up and businesses open up, there remains a lot of uncertainty, and industries have all been affected in different ways. In many cases, that left students collecting interest or paying hundreds of dollars every month on student loan repayments without much in the way of job prospects. It has been a difficult stretch of time for many fresh graduates.
Students had a harder time finding financial help during COVID-19 than many others. There were minimum income thresholds to qualify for CERB, and many full-time students graduated without being able to access those income supports. Student loan cancellation has not been part of the Canadian government’s pandemic relief measures, but there are programs in place to help recent graduates.
What Is Student Debt Cancellation?
Student debt cancellation is gaining attention in Canada after President Joe Biden campaigned in the United States with a proposal to cancel $10,000 in student debt. Student loan debt cancellation means forgiving all or a portion of a person’s student loan debts. In the United States, the current student debt cancellation program is only available through borrower defense to repayment, i.e., in cases where the borrower was defrauded by their school, such as by making claims about guaranteed employment or lying about the transferability of credits. The Biden administration is still looking into programs that would offer universal or means-tested student debt cancellation.
Student debt cancellation is not the same as having the loan discharged in bankruptcy. After filing bankruptcy, your credit score will be affected for years to come. You may also lose assets or have to make some kind of monthly payment in surplus income. A student debt cancellation program would erase those debts without any of the same consequences.
In Canada, student debt cancellation is a subject of political debate, but there are no programs in place currently to erase those debts.
Why Isn’t the Cancellation of Student Loan Debt Happening?
Student loan cancellation has not been on the table for the federal government in Canada. Although some political parties have called for student loan debt cancellation up to $20,000, that remains a long way away from becoming official policy.
However, the government has taken measures besides student loan cancellation to give students a break and help them find some financial stability in an unpredictable economy. Let’s take a look at what measures have been in place and how they have changed.
COVID-19 Student Loan Relief Measures
In April 2020, the federal government imposed a six-month freeze on repayments and interest for Canada Student Loans. Although there was no student loan cancellation, for a six-month period, graduates did not have to make payments, and no interest collected on their student debts.
This kind of debt deferral was great for anyone who couldn’t find work or had their hours reduced due to COVID-19 but was able to get into the workforce by the time the moratorium ended. The debt didn’t go away, but it could wait until recent graduates found employment.
That moratorium ended on October 1, 2020, but there were still options for those who were out of work or only working part-time. For example, the Repayment Assistance Plan for Canada Student Loans provides temporary relief. Graduates who earn less than $25,000 annually in gross income and who live alone can postpone payments for six months. If they still meet the requirements after that six-month period, they can apply again. There are also eligibility thresholds for households with more than one person, which is important for many of the new graduates living at home as a result of the pandemic.
How Is Student Loan Relief Changing?
With the release of the federal budget in April 2021, student debt relief measures from the federal government were proposed to provide more long-term help to recent graduates. There have been some important changes to Repayment Assistance Plans that will come into effect in 2022, expanding eligibility and providing more help for recent graduates. This is what has changed:
- The accumulation of interest has been suspended on Canada Student Loans until March 31, 2023.
- The eligibility for Repayment Assistance Plans will be raised to include those who earn $40,000 or less in gross income annually, allowing more people to postpone their repayments.
- There will be expanded eligibility thresholds for those living with more than one person.
- Monthly student loan payments may be capped at 10 percent of household income rather than the current 20 percent.
Even if student loan cancellation isn’t in the near future, there are expanded debt relief options coming. The cancellation of interest on student loan debt also provides widespread relief for recent graduates, regardless of income.
Updates on Other COVID-19 Support Measures
Many of the programs that have supported Canadians through the pandemic are winding down. Although many people are still talking about CERB, there are some very important CERB updates that you should be aware of.
The CERB program officially ended almost a year ago in September 2020. Canadians whose employment status was still impacted by COVID-19 were shifted onto EI or a new program called the Canada Recovery Benefit (CRB). Workers who would not usually qualify for EI were directed to CRB.
As of August 2021, CRB benefits have gone from $1,000 per two-week period down to $600 per two-week period. Unlike CERB, the taxes on CRB are withheld at the source, so recipients will receive $540 for the two-week period.
How COVID-19 Measures Can Impact Your Taxes
With the deadline for your 2020 income taxes now several months passed, most Canadians who applied for the benefit know how CERB and taxes work. CERB payments were not taxed at the source, allowing the federal government to rapidly send payments out. However, that meant it was up to Canadians to withhold the money themselves and repay it come tax time. Some Canadians have been met with income tax bills they weren’t prepared to pay as a result.
The cancellation of student loan debt interest charges will also impact your taxes. When you file your income taxes, you can claim an amount for the interest paid on your student loans. Claiming interest on your student loan reduces your taxable income, and therefore reduces your tax bill. With the moratorium on interest charges, this claim will be reduced or eliminated. Not having to pay interest charges at all should save you more money than the tax credit, but it is worth considering if you are used to claiming student loan interest on your taxes.
What Can You Do About Student Loan Debt You Can’t Pay?
Without student loan cancellation, many Canadians are struggling with their student debts. Student debt remains a significant factor in why Millennials consider filing for bankruptcy, and they’ll soon be joined by younger Generation Z graduates who have struggled to find work out of school.
Many people struggling with their debts often ask us about filing bankruptcy or getting a consumer proposal for their student loans. Unlike other types of debt, there are special rules around bankruptcy or consumer proposals and student loans that can prevent you from being discharged from that debt right away.
Student loans are subject to the seven-year rule. They cannot be discharged in bankruptcy or a consumer proposal until seven years after you were last a student, either part-time or full-time.
One exception to this rule is the hardship provision, which allows debtors to have student loan debts discharged after only five years.
However, the seven-year rule doesn’t mean that bankruptcy won’t help. Because of the repayment relief options offered by the government, student debt usually isn’t the sole cause of financial insolvency. It’s getting into other, high-interest types of debt or becoming so overburdened that it’s a struggle to pay all of your bills on time.
Insolvency is a way of bringing your debt under control. You pay back what your financial situation reasonably allows, either by selling off assets or agreeing to a monthly repayment plan, while the rest of the debt is discharged, and you no longer have to pay it back. With the help of Licensed Insolvency Trustees in Canada, you can learn more about these options and whether they are best for your financial situation.
If your student debts are not eligible for insolvency yet, there are other options to explore, including the Repayment Assistance Plan.
Although student loan cancellation is not available in Canada at the moment, interest relief and the Repayment Assistance Plan should help you if you are struggling financially. If those solutions aren’t enough to help with your debt problems, book an appointment with David Sklar & Associates for more thorough help.
