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CRA collections on student loans – how to act

Posted on 14 April 2022

Written by Gillian Goldblatt

Much like any other debt, if you default on payments for your student loan, your creditor can send your account to a collection agency. If you are experiencing CRA collections on student loans, you will know how stressful the experience can be. The Canada Revenue Agency is empowered to take action in ways that other creditors cannot. For this reason, it is important to take your student loan debt very seriously, and to act quickly. If you are struggling to make your student loan payments, thankfully you have options. Of course, we would all like to pay our debts off in full and on time, but when this is not possible you can incur interest and face other consequences. Given the challenging situation regarding the recent pandemic, the CRA are in fact open to working with you on a payment arrangement that works for you. In this article, we will explore the consequences of CRA collections on student loans, and how you should act to minimize them.

What happens when your student loan is in collections?

There are two primary types of student loan – government student loans, and private student loans, which typically include a student line of credit with a bank. If you have a private student loan, you might expect to receive collection calls from an agency. If your student loan debt remains within the Statute of Limitations period, your creditor can also pursue legal action against you. In Ontario, the Statute of Limitations period is two years. On the other hand, you may well have a government student loan. For these loans, CRA collections on student loans can have much more severe consequences. Generally speaking, government student loans are separated into both a provincial portion, and a federal portion. Your overdue federal student loan will likely be sent to the CRA for collection if you have missed payments for around nine months. The provincial portion of your student loan can also be sent to a collection agency if you are several months in arrears. Where the CRA is concerned, they boast strong powers when it comes to collection. Consequences include freezing your bank account, and a wage garnishment without even needing to take you to court beforehand. They can also prevent you from getting your tax refund and any other federal benefits you may be owed. The chances are that CRA collections on student loans will continue until your debt is paid in full.

What powers does the CRA have for collecting on student loans?

Given the powers of the government, the CRA unsurprisingly has collection powers that go beyond anything any other creditor can do in order to collect their debts. For this reason, student loan debt owed to the government must be taken seriously, and you need to act quickly. While a regular creditor will have to take you to court in order to obtain a judgement before pursuing a wage garnishment against you or freezing your bank account, the CRA does not need to. Equally, where a regular creditor will only be able to garnish 20% of your wages, the CRA can garnish 100% of your wages. As part of the powers of CRA collections on student loans, they also have the power to withhold any federal benefits or credits you may receive. They can even put your income tax refund and/or GST refund towards your student loan. Another note to be aware of is that there is no limitation period for federal student loans. Typically for debts owed to creditors other than the government, there is a limitation period which acts as a window within which creditors can pursue legal action against you. Anything beyond this time limit, and they cannot. In Ontario, the limitation period is two years. The CRA, however, does not need to abide by this period – they can collect at any time.

How can you stop CRA collections on student loans?

When it comes to stopping CRA collections on student loans, thankfully there are a few options available to you:

Repayment Assistance Plan (RAP)

If you are current on your student loan payments, you may be eligible for a Repayment Assistance Plan (RAP). This is supported by the Canadian government, and is helpful if you are struggling to make your student loan debt repayments. You can simply log in to your National Student Loans Service Centre (NSLSC) account to find the tools needed to find an appropriate repayment plan. You can also contact the NSLSC directly to learn more about the options available to you. If you have a student loan from Alberta, Manitoba, Nova Scotia, or Prince Edward Island, you can reach out to your province directly for support. If, however, you have missed several payments and are in arrears while there are CRA collections on your student loans, you may need to find another solution.

File a consumer proposal

Your first step here will be to book a free consultation with a reputable Licensed Insolvency Trustee. Filing a consumer proposal is a way of reducing your student loan, and getting you on the path to a fresh financial future. You must note that there is a seven year rule for any government student loans. According to the Bankruptcy and Insolvency Act, any debt under the Canada Student Loans Act or the Canada Student Financial Assistance Act can only be filed as part of a consumer proposal if there has been more than seven years since your end of study date. For this reason, you will need to confirm your end of study date with the Canada and provincial student loan departments. Private loans, however, do not incur the seven year rule. Consumer proposals are a great way of reducing your debt by up to 80%. It is essentially a legal debt settlement whereby a Licensed Insolvency Trustee will negotiate an affordable monthly payment for you with your creditors. There are many advantages of a consumer proposal as a bankruptcy alternative, including the ability to keep your assets. As soon as you file, a stay of proceedings will be triggered. This will immediately protect you from CRA collections on student loans, including stopping any wage garnishments.

File bankruptcy

If a consumer proposal is not quite right for your financial circumstances, or perhaps you do not have many assets to lose, bankruptcy could be a good option for stopping CRA collections on student loans. To file bankruptcy, you will need to consult a Licensed Insolvency Trustee, the only professionals in Canada legally able to file all forms of debt relief. Once again, the seven year rule will apply for any government funded debts. Bankruptcy is the process of assigning any non-exempt assets over to your trustee in exchange for clearance of any remaining unsecured debt, including student loan debt. This allows for a fresh financial future, free from the stresses of overdue debt payments or collection calls. Much like filing a consumer proposal, bankruptcy will trigger a stay of proceedings to offer immediate protection from collection calls and wage garnishments pursued by the CRA. Learn more about the advantages of filing bankruptcy.

How will CRA collections on student loans affect my credit report?

Unfortunately, if you have late payments on your student loans, it will be reflected on your credit report. Canada Student Loans will report late payments to the major credit bureaus, Equifax and TransUnion. If your student loan is private, your bank or lender can also report arrears to the bureaus too. For this reason, your credit score will likely be negatively impacted. The important thing to remember is that no matter how bad your credit score may be, you can always work to rebuild it. Typically, late payments will stay on your credit report for six years. Filing a consumer proposal or bankruptcy will freeze any late payments, and these can be erased once you are discharged from bankruptcy or complete your consumer proposal. This will have a positive impact on your credit score. At Spergel, our Licensed Insolvency Trustees have been helping Canadians become debt free for over thirty years, and we can assist you in rebuilding your credit score. You should note that if you are intending on going back to school, having late payments on your student loans could have an impact on your ability to receive new loans. This can be changed by making your loan current on payments, although there are further implications if you are receiving collection calls from the CRA. Speak to your Licensed Insolvency Trustee for further advice on your options for getting another student loan despite ongoing financial difficulty.

If you are struggling with CRA collections on student loans, you need to act fast. If you are not eligible for a Repayment Assistance Plan, book a free consultation with an experienced Licensed Insolvency Trustee at Spergel. We will share options and recommendations with you, no matter what your situation. Reach out to Spergel today – you owe it to yourself.

Gillian Goldblatt

Gillian Goldblatt

Gillian Goldblatt is a Chartered Professional Accountant and Insolvency and Restructuring Professional. She is also an award-winning LIT (Licensed Insolvency Trustee) and Vice-Chair of the Ontario Association of Insolvency & Restructuring Practitioners Board. As Spergel's resident expert on debt consolidation and financial literacy, you can find Gillian being interviewed regularly on popular Canadian news programs when she's not at the office helping individuals and businesses get back on track.

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