Student debt crisis: how to eliminate student loan debt

Posted on 18 March 2023

Written by Chris Galea

It will likely come as no surprise to you that Canada is in the midst of a student debt crisis. In a world where the vast majority of costs are increasing – the cost of living and rising interest rates to name a couple – so too is the cost of student loans. Nowadays, more and more young Canadians are taking out student loans. With fees increasing, this is naturally leading to larger student loans. In turn, this means more insolvencies due to student debt, and a subsequent student debt crisis. In 2022, almost 50% of Ontario insolvencies were filed by millenials, with student debt making up 30% of their total unsecured debt. Extrapolate this across Canada, and the figures are even more alarming. In this article, we explore the student debt crisis in Canada, and share what you can do if you too are grappling with student debt.

The student debt crisis in Canada

While you may be thinking that student debt making up 30% of the average millennial insolvency is a proportion of a wider figure, put into perspective, student debt is an epidemic in Canada. This is due to the proportion of student loan borrowers versus the overall population, and the young age of these borrowers. The amount of student debt currently outstanding is huge – as of 2020/2021, Canada Student Loans (CSL) has lent $4 billion in student loans to over 576,000 students. Although it was a 5% decrease in the total number of recipients year on year, shockingly it was an increase of 15% in value compared to the previous year, showing that the total amount of debt is increasing contrary to the reduced number of students. Even this is not the full picture – on top of federal government loans, students are also financing their studies through other means too – including provincial student loans and private loans. For most students, around 60% of their Canada Student Loans assessed financial need is provided through federal student loans. The remaining 40% is covered by the province or territory. In Ontario in 2019/2020, OSAP funded around around $4.6 billion in financial aid to over 440,000 students, with a major portion of this being repayable loans vs grants. There is no specific report we can look to in order to assess private student loans, but you can only imagine the additional borrowing on top. This is not to mention the students who supplement their student loans by borrowing credit card debt, or via personal loans or student lines of credit to further increase their average student debts.

Increasing tuition fees leading to insolvency

Of course, the price that students now need to pay for their education is contributing to growing student debt, and a subsequent increase in insolvencies. For 2022/2023, the average cost of undergraduate tuition at a Canadian university is $6,834 – this is an increase of 20% in the last decade. This is before we add on other obligatory fees including study materials, accommodation, and so on. The majority of post-secondary education is being funded by student loans, and despite the addition of the Canada Education Savings Grant program, half of Canadians aged between 18 and 24 have a student loan. This is a combination of both government and private student loans. As if this was not bad enough, the student loan debt taken out is proven to hang around and is not cleared quickly. TD anticipates that most students take ten years to pay off their student loans. Some students do not even get to repay their student loan debts – instead, they declare insolvency.

Student debt is leading to insolvency much sooner

You do not have to search far in the news to see how millennials are increasingly finding themselves struggling with debt. In fact, nearly half of all insolvencies in 2022 were filed by millennials. This means that the rising cost of tuition is causing problems for students and graduates alike. Increasing debt when students are graduating is simply not sustainable, and it is causing many graduates to file insolvency much sooner than they would have in the past. The average debt by age in Canada is has grown considerably for those aged between 18-29. There is a trend since 2016 that shows that the average age of debtors is getting younger, and nowadays the average insolvent millennial is just 33. In order to have student loan debt reduced or eliminated via a bankruptcy or a consumer proposal, individuals need to have stopped their studies at least seven years ago. This is often why the average individual filing insolvency is in their early to mid thirties. They may well have been struggling with debt throughout their twenties. Although federal and provincial student loan and grant schemes including the Ontario Student Assistance Program (OSAP) has helped more students get to college or university, it has also led to an increase in people dropping out. Any student that drops out still needs to repay their student loan debt, which can prove particularly challenging when they cannot suitable employment. Although they too can have their student loan debt eliminated, they need to wait until seven years pass from the end date of their studies before they can file either a consumer proposal or bankruptcy.

Employment challenges leading to student debt default

When it comes to the student debt crisis, many students say that poor finance management is a key debt problem, as well as employment issues. Although according to Canada Student Loans the three-year default rate for students has been decreasing since 2012, this is likely due to an increased usage of the Repayment Assistance Program (RAP). Canada Student Loans reported a total of 309,348 borrowers in the Repayment Assistance Plan for 2020/2021, which has increased over the past five years. As university graduates often end up taking on multiple roles – unpaid internships, part time roles, and minimum wage roles, it can be increasingly challenging to secure a stable job with sufficient income to sustain student loan debt repayments and general living expenses. On top of this, there are increasing rents across Canada, particularly in major cities. This has led to more debtors with unpaid student loan debt. If this situation continues for seven years following the last date of studies, they may file a consumer proposal or bankruptcy as a form of debt relief if they continue to struggle.

Accumulating postgraduate debt and being unable to fulfil financial obligations

Making student loan debt payments after graduation is not as straightforward as budgeting to repay loans. Having such vast debts at such a young age can cause cash flow issues, especially when most are earning a lower wage than the average income. Graduates finding it difficult to repay student loan debts may struggle to build up emergency savings, save for a downpayment on a home, and maintain their student loan repayments. For this reason, some look to other forms of income including credit card debt and payday loans. By taking out this additional credit, additional debt is accumulated which can often lead to insolvency. In 2022, over one in three millennials carried student loan debt, owing on average $16,725 – student debt was a whopping 30% of this total unsecured debt. For this reason, student loan debt appears to be the key culprit.

Women are hit harder by student loan debt

Interestingly, student loan debt is a greater problem for women. According to 2016/2017 numbers from Canada Student Loans, 61% of Ontarians with student debt were female. They also reported that 65% of Repayment Assistance Plan (RAP) recipients were female. Women are also less likely to find work after graduating. Even if they do, they are more likely to be out of work for reasons including maternity leave and childcare, hindering their ability to keep a steady source of income. This increased difficulty to secure income makes it challenging for women to make their student loan debt repayments. On top of this, women are more likely to be single parents than males. This makes it even more difficult for women to juggle childcare and student loan repayments on one income. Compounded by the gender pay gap, the situation does not look bright for women when it comes to student loan debt in Canada at present.

How to eliminate student debt

Despite government attempts to make student loans more affordable and accessible to Canadians, interest charges on OSAP loans continue to increase, reversing some of the measures put in place by the government previously. The introduction of the Repayment Assistance Program has attempted to support students facing financial difficulty, although many recipients of the program are still facing insolvency or do not qualify for the program’s strict criteria. In some cases, delaying payments is not helpful when they are facing other debt issues. When repayment assistance is insufficient, those with student loan debt they cannot shift usually turn to the Bankruptcy and Insolvency Act for support via a consumer proposal or bankruptcy.

Filing a consumer proposal

Filing a consumer proposal is the only form of legal debt settlement. It is the process of working with a Licensed Insolvency Trustee to propose an affordable monthly repayment figure to your creditors. If they agree, the rest of your debt is cleared. You are only committed to making these affordable payments for a fixed period of time, up to five years. It can reduce your debt by up to 80%, and has a number of other key advantages including allowing you to keep your home and car and offering protection from creditors. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.

Filing bankruptcy

Bankruptcy is the process of assigning any non-exempt assets you may have over to a Licensed Insolvency Trustee to go towards the repayment of your creditors. In exchange, you will be cleared of your remaining debts. Bankruptcy is the best way to gain a fresh financial future in Canada. Although many Canadians think that bankruptcy will leave them with nothing, this is not the case. Each province lists out assets you can keep, including clothes and a vehicle and your home within a certain threshold. Unlike other bankruptcy firms, at Spergel you are assigned your own Licensed Insolvency Trustee to walk you through the entire process, instead of being passed from person to person.

Notably, you must wait seven years from finishing your studies before including government funded student loan debts as part of a consumer proposal or a bankruptcy. That said, clearing your other unsecured debts can ease the burden of not knowing how to make your student loan payments. It can help to make these repayments much simpler and less stressful. There is also the possibility of gaining student loan forgiveness if you can prove that you are facing financial hardship. Private student loan debts, including bank loans, credit card debt, and student lines of credit can be discharged in a consumer proposal or bankruptcy without a compulsory waiting period. The best place to start if you are struggling with financial difficulties is to speak to a Licensed Insolvency Trustee – they will review your unique financial circumstances and advise you on the best pathway to debt relief for you.

If you have any questions on the student debt crisis, or are struggling with your student loan repayments, book a free consultation with Spergel. Our expert Licensed Insolvency Trustees have been helping Canadians gain debt relief from their student loans for over thirty years, and we can help you too. Reach out today – you owe it to yourself.

Chris Galea

Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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