Ibrahim Gardner
Student loans are a common way for students in Canada to fund their education. However, the reality of repaying these loans can be daunting for graduates, especially when they are just starting in the workforce or searching for employment. The average borrower takes between nine and fifteen years to fully pay off their student loan, and the average debt post-graduation is $16,727 for university graduates, $10,172 for college graduates, and $29,000 for doctoral graduates. For those who are unable to keep up with loan payments, there are several options to consider, including voluntary renegotiation, the Canada Repayment Assistance Plan, and bankruptcy or consumer proposal.
| Characteristics | Values |
|---|---|
| Average time to repay student loan | 9-15 years |
| Average debt post-graduation | $16,727 for university, $10,172 for college, and $29,000 for doctoral |
| Time until payments are due | 6 months after graduation |
| Interest accrual during this time | No (Canada Student Loans), Yes (some provincial loans) |
| Repayment Assistance Plan | Available |
| Reduction in monthly payment | Available |
| Reduction in interest rate | Available |
| Change in frequency of repayment | Available |
| Default | After 9 months of non-payment |
| Bankruptcy | Student loans are not erased |
| Contact | National Student Loans Service Centre |
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What You'll Learn
Negotiate new payment terms
If you are struggling to pay back your student loans in Canada, you can negotiate new payment terms with your lender. This process is known as voluntary renegotiation or debt settlement. It involves discussing with your lender to modify the terms of your existing loan, often due to financial hardship. You can initiate negotiations even if your loan is not in default, and it is often better to start discussions before reaching a state of default as lenders may be more receptive to finding a solution.
Reduce monthly payments
You can ask your lender or Canada Student Loan to reduce your monthly payment, either temporarily or permanently. This option will lengthen the term of your loan, resulting in higher overall interest costs. However, it can provide financial relief if you are facing temporary difficulties, such as unemployment.
Interest-only payments
If you have a Canada Student Loan, you can request to make interest-only payments for up to 12 months. This option can reduce your monthly payment obligations while keeping the overall loan term unchanged.
Interest rate reduction
If you have a private lender, you can request an interest rate reduction. A lower interest rate can make your monthly payments more manageable without extending the loan term.
Extend the loan term
You can also negotiate to extend the loan term to reduce your monthly payments. For example, you can change the default term of 114 months to the maximum term of 174 months for federal student loans. While this option will result in lower monthly payments, it will also increase the overall interest costs over time.
Lump-sum payment
Debt settlement with your lender may involve agreeing to a lump-sum payment for your debt, which is usually less than the original balance. Lenders may accept this option rather than risk losing all the money they gave out.
Discretionary compromise
A discretionary compromise involves paying less than the original debt plus interest. Private student loans may offer more flexibility with various settlement options.
It is important to carefully review and understand the new loan repayment terms before agreeing to any changes. Negotiating new payment terms can help you manage your budget and ensure you can continue making monthly payments. However, keep in mind that modifying the terms of your loan will affect the overall cost and duration of your loan.
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Repayment assistance plans
If you are facing difficulty in repaying your student loan in Canada, there are a number of options available to you. Firstly, you can get in touch with the National Student Loans Service Centre (NSLSC) to discuss a manageable repayment plan. You can also access tools to help you find a repayment plan by logging into your NSLSC account.
If you have missed a loan payment, your loan may be sent to a collection agency. In this case, you can contact the Canada Revenue Agency (CRA) to make a payment arrangement and bring your loan up to date.
If you are experiencing financial hardship and are unable to make your payments, you can apply for a Repayment Assistance Plan (RAP). The RAP is a government program that helps borrowers who are facing financial difficulty. Depending on your income, you may qualify for reduced payments or no payments at all. To be eligible for the RAP, you must apply every six months and provide information about your income and family size. If you are approved for the RAP, the government will pay any interest owing on the federal part of your loan that your reduced payment does not cover. After 60 months of participation in the RAP or 10 years after you finish school, the government will start to pay down the principal and any remaining interest.
There are also specific repayment assistance plans for borrowers with disabilities (RAP-D) and Canadian Forces reservists on designated operations. If you have a permanent disability that limits your ability to work, you may be able to have your student debt cancelled through the Severe Permanent Disability Benefit (SPDB). If you are a Canadian Forces reservist, you do not have to make payments on your student loans while on a designated operation.
In addition to the RAP and RAP-D, there are other programs that can help with loan repayment, such as loan forgiveness for doctors and nurses working in rural or remote areas.
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Grace periods
In Canada, there is a 6-month non-repayment period or grace period for student loans after you graduate, finish your studies, or are no longer a full-time student. During this grace period, interest will accumulate and be added to your loan balance, also known as your loan principal. The interest rates on your first payment date are used to calculate your monthly payments.
While you are not required to make any payments during the grace period, you can choose to do so. Making payments during this time will significantly reduce the total amount you will have to pay over the life of your loan. You can make extra payments or pay more than the minimum amount each month without penalty.
After the grace period ends, you will receive a package from the National Student Loan Service Centre (NSLSC) detailing your payment terms and options. This package will outline your repayment schedule, including the amount you need to pay each month. You will then need to start making payments according to the provided schedule.
If you are facing financial difficulties and are unable to make your loan payments, the Government of Canada offers Repayment Assistance Plans (RAP). Depending on your income, you may qualify for reduced payments or no payments. You can apply for repayment assistance at any time during the repayment period, but you must re-apply every 6 months to maintain your eligibility.
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Defaulting on loans
Defaulting on a loan means that you have missed your monthly payments for 270 days (nine months). If your loan defaults, the government can try to collect their money through your annual income tax return or send your loan to a collection agency. You will also be disqualified from receiving future financial assistance or from applying for repayment assistance.
If your loan is in collection, you can contact the Canada Revenue Agency (CRA) to see if you qualify to have your federal student loan brought back into good standing. To bring your loan back into good standing, you must make the equivalent of two monthly payments and choose one of the following options, if applicable:
- Arrange a repayment schedule with the CRA
- Repay or consolidate all outstanding interest owed on their Canada Student Loan
- Make the equivalent of two monthly payments on the loan as agreed to in the repayment schedule with the CRA
If you are having trouble making a payment, there are a number of options available to you, including reducing your overall monthly payment, requesting to reduce your interest rate, and changing your repayment frequency.
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Impact on credit score
Student loans can have a positive or negative impact on your credit score. The effect it has depends on how you manage your repayments. Making timely payments on your student loan can help improve your credit score, but missing payments can have the opposite effect.
Your student loan repayment plan becomes part of your payment history, which is the biggest element considered when calculating credit scores. Making on-time payments every month is a positive habit that can help build healthy credit. However, if you miss payments, you could face various consequences, including penalty fees and a negative impact on your credit score.
If your payments are overdue by at least 270 days, your student loan will be in default and transferred to the Canada Revenue Agency (CRA) for collections. At this point, your credit score will be affected, and you may be charged penalty fees. The CRA may also withhold your income tax refunds, garnish your wages, or seize your assets.
Fortunately, there are several loan forgiveness programs available in Canada that can help you manage your debt while protecting your credit score. For example, you may be eligible for the Repayment Assistance Plan (RAP) if you took out a provincial or federal student loan. This program allows the government to share the cost of the loan with you, and you only need to repay what you can afford. You may also be able to skip payments during a 6-month grace period.
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Frequently asked questions
Failing to pay your student loan has serious consequences for your credit score, making it difficult to get a mortgage, car loan, or line of credit in the future. Your loan will be considered in default if you don't pay for 270 days, and it will be transferred to the Canada Revenue Agency (CRA) for collection. CRA can use collection methods such as wage garnishment and bank account freezes.
The average borrower takes between nine and 15 years to fully pay off their student loan. However, it takes the average post-secondary student more than 10 years to repay their student debt in full.
After graduating, contact the National Student Loans Service Centre (NSLSC) or your provincial loan provider to set up a repayment schedule and determine how much you'll pay. It is up to you to decide how much you'll pay based on what you can afford.
The Repayment Assistance Plan is a program designed to help borrowers who are struggling to repay their Canada Student Loans. It may reduce or eliminate monthly payments based on income. Graduates can obtain full relief from payments while their income is below a set threshold.
If you're having trouble paying your student loan, you have several options. You can apply for the Repayment Assistance Plan, customise your payment terms, or make interest-only payments. You can also contact your student loan lender and negotiate new payment terms.
