I'm in Debt. What Now?

First off, you're not alone. According to millenniumscholarships.ca, five years ago 60% of college students expected to graduate with debt. According to the Canadian Medical Association, "Mortgage-sized debt the new normal for medical students." According to that article written in 2003:

Fees for Ontario schools now range from $13 500 at Queen's University to the country's high of $16 207 at the University of Toronto. Tuition fees at both Dalhousie ($10 460) and the University of British Columbia ($10 272) entered 5-digit territory this year, and the universities of Calgary ($9932) and Saskatchewan ($9774) will probably get there next year.

According to the Canadian Bar Association, a 2004 study showed 40% of law students currently graduate with at least $40,000 in debt, while 13% graduate with at least $70,000 in debt."

According to the Stats Man's National Graduates Survey published in 2004, 24% of bachelor graduates and 30% of college graduates reported difficulties repaying their debt. Hey, that doesn't include the people who went on to do post-graduate work - almost essential if you want to get a great job or have a profession.

In June 2007, the Ottawa Sun reported that 1.6 million student loan borrowers owed a whopping $10.6 billion in debt. By August 2008, when I was writing this, the Canada Student Loan balances (so not including provincial and private student loans) had grown to almost $13 billon, according to the Canadian Federation of Students "clock". Combine the government student loans with privately held student loans, and the overall figure is much, much higher. Back in 2001, MoneySense magazine estimated that it was closer to to $20 billion. I can only imagine where it sits now. Ouch!

Okay, we can agree that student debt is growing and so is the sense of helplessness many people feel when they graduate from school and look at their accumulated debt - both through federal and provincial student loan programs, and through private forms of credit.

So, what do you do?

Well, you could declare bankruptcy! No, that won't work. Even if you owe more money than you can afford to repay, you'll have to suck it up because you're not allowed to discharge student loan debt through bankruptcy until you've been out of school for at least seven years. This is brand new, and very good news. New legislation was brought into effect in July 2008, to reduce the automatic discharge period from ten years to seven and if you're buried in debt and have been out of school for at least seven years, you should head off to see a bankruptcy trustee quick like a bunny.

I'm not a big advocate of bankruptcy as a panacea for overspending. But I do take issue with the fact that the Canada Federal Student Loan system actually charges MORE than our banks and other lenders for the use of their money.

Why? Two good reasons:

  • First, no interest accumulates on your student loan debt while you remain in school… so it's interest-free borrowing until you leave school, and
  • Second, they give you a six-month window during which you do not have to make payments after you've left school, so you have some time to find a job. You are, however, charged interest. Believe it or not 64% of borrowers don't know this. Hello! Didn't you read the fine print?

So why don't people just consolidate their student debt with a regular lender after school? Again, a few of reasons:

  1. First, they may not qualify. That's right, having taken out whopping loans to get a ho-hum degree, which has left you earning ten bucks an hour, no other lender may consider you a good enough risk,
  2. Most lenders won't be happy with you taking TEN YEARS to repay your student loans; that's how long the student loan program expects you to take (and believe me, they are raking in the money while you do this!) , and
  3. If you go to another lender, it means you're serious about repaying your loan, no ifs, ands or buts!

Ya see, as long as you're part of the student loan program, you may pay through the nose, but you have options. Canada Student Loans or Integrated Student Loans (offered by Saskatchewan, Ontario, New Brunswick, and Newfoundland and Labrador) will let you:

  • temporarily take a pass on payments: Unemployed or not earning much money? If you are unable to make payments, you could be eligible for Interest Relief through which the government will pay the interest on your loans for you
  • decrease your monthly repayment amount by extending the amount of time it will take overall for you to pay off your loan up to 15 years.
  • reduce the amount of your student loan up to three times to a maximum of $26,000, if you face exceptional long-term financial difficulties and have been out of school for at least 5 years.
  • eliminate your loan completely if you have a permanent disability -- physical or mental -- that restricts your ability to perform the daily activities necessary to go to school or work.

Go to Canlearn.ca for all the information you may need.

There are also several tax relief measures that have been brought in to try and help students deal with the growing debts with which they're graduating. There is:

  • a 17% tax credit on the interest you pay on your student loans each year
  • an education claim of $400 per month on your tax form for full-time studies
  • a non-refundable textbook tax credit of $65 for each month you're enrolled in a course that entitles you to a full-time education tax credit
  • a full tax exemption for all post-secondary scholarships and bursaries. You'll still receive a T4A slip but the amount doesn't need to be reported on your income tax return.

The Tax Man has a brochure you can read for more information.

If you do not make your student loan repayments on time, the government will send your account to collections, you will be badgered, and you'll end up with a really crappy credit history. You could end up paying more in interest. They will hold your tax refunds. And you could face legal action.

The best way to avoid this, of course, is to graduate with only the debt you can manage to repay. Failing that, you're going to have to work really hard for a few years to get the monkey off your back. It doesn't matter how hard you have to work, how many hours, how many extra jobs, DO IT! Whining isn't going to get you out of debt.

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