Ibrahim Gardner
Student loans are a common way for students to pay for their studies in Canada, with the government providing billions in loans to hundreds of thousands of students. However, with the average debt post-graduation being over $10,000, many graduates struggle to repay their loans. So, what happens if you don't pay your student loans in Canada? Firstly, it's important to distinguish between different types of loans, as government-guaranteed student loans differ from private student loans in terms of debt relief solutions. Missing payments on any loan will affect your credit, making it difficult to get a mortgage, car loan, or line of credit in the future. If you miss nine months of payments on a government loan, it is considered to be in default and will be sent to the Canada Revenue Agency for collection, which can include freezing bank accounts and garnishing wages. For private loans, lenders will likely refer your account to a collection agency, which may pursue legal options such as wage garnishment. While bankruptcy can wipe out student debt, it is not always a solution, as it must be declared at least seven years after finishing school.
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What You'll Learn
The impact on your credit score and report
Failing to pay your student loans in Canada can have serious consequences for your credit score and report, making it difficult to secure loans or credit in the future. However, the specific implications depend on several factors, including the type of loan, the province, and the repayment history.
Firstly, it is important to understand the different types of student loans in Canada. There are federal Canada Student Loans, provincial student loans, and private student loans, such as bank loans, student lines of credit, or student credit cards. The consequences of non-payment vary depending on the type of loan.
For federal Canada Student Loans, missing payments will negatively impact your credit score and report. If you miss payments for 9 months (270 days), your loan is considered in default, and it will be sent to the Canada Revenue Agency (CRA) for collection. At this point, the CRA can take broader collection actions, such as freezing bank accounts and garnishing wages. Additionally, your tax refunds may be withheld and applied towards your student debt.
Provincial student loans may have different repayment rules depending on the province. For example, in Alberta, missing student loan payments can result in a poor credit score that lasts for 7 years, making it challenging to obtain future loans or credit.
Private student loans, such as bank loans, student lines of credit, or student credit cards, are treated similarly to other unsecured debts. If you stop making payments, the lender will likely refer your account to a collection agency, and you may receive collection calls or face legal action. After a certain period of non-payment, the debt may be sold to a new debtor, who will continue collection efforts.
It is worth noting that some sources suggest that student loans in Canada may not significantly affect your credit score as long as you make the minimum interest payments. Additionally, there are options available to help manage student loan debt, such as the Repayment Assistance Plan, customizing payment terms, or applying for interest relief or principal reduction in specific circumstances.
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Collection actions and wage garnishment
If you are having difficulty paying your student loans, you can apply for a Repayment Assistance Plan, customise your payment terms, or make interest-only payments. If you do not make payments, the relevant student aid service centre will try to contact you by phone and email. After 150 days, your overdue loan is transferred to a debt collection agency, such as the Treasury Board and Finance – Crown Debt Collections in Alberta.
Once your loan is in collection, you are no longer able to get student aid. To be able to get student aid again, you must bring your loan up to date. Contact the CRA to make a payment arrangement. If you have missed payments for 270 days or more (nine months), the federal part of your loan is sent to the Canada Revenue Agency (CRA) or your Province and/or Territory for collection.
If your loan is in collection, contact the 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. Once you make your payments, contact the National Student Loans Service Centre (NSLSC) to complete the process.
Even if you default on your loan, you can work with the relevant debt collection agency to come up with a repayment plan that works for you. If you are having financial difficulty and cannot make your payments, the Government of Canada can help you pay towards your loan through a Repayment Assistance Plan. Depending on your income, you may qualify for reduced payments or no payments at all.
It is important to note that if you file for bankruptcy within seven years of finishing your studies, your Canada Student Loan will not be cancelled, and you will have to continue paying it back.
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Bankruptcy and consumer proposals
The seven-year period starts when someone is no longer a student, not from the loan's opening date. Returning to school, even part-time, may reset the seven-year period. The seven-year rule also applies to consumer proposals, and if it has been less than seven years since attending school, government-guaranteed student loans will not be discharged.
However, filing for bankruptcy or a consumer proposal can provide some relief as lenders cannot collect debts during these processes. This is called a stay of proceedings. It is possible to reduce the seven-year period to five years if repaying the loan causes "undue hardship", but this requires a court order and legal assistance.
After bankruptcy or a consumer proposal, individuals may still be able to apply for new student loans, but their application will be scrutinized more closely. They must disclose their previous financial situation and may need to provide additional information.
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Repayment assistance and customised payment plans
If you are facing financial difficulty and are unable to make your student loan payments in Canada, the Government of Canada can help you pay towards your loan through the Repayment Assistance Plan (RAP). Depending on your income, you may qualify for reduced payments or no payments at all. You can apply for repayment assistance as soon as you start repaying your student loans, and you must re-apply every 6 months to stay eligible.
If you are on 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 RAP or 10 years after you finish school, the government will start to pay down both the principal and any remaining interest. If you are on RAP-D, the government will pay down both the principal and any interest that your reduced monthly payments do not cover. As long as you remain eligible for repayment assistance, the balance of your loan will continue to be paid until it is paid in full.
You can apply for RAP through your National Student Loans Service Centre (NSLSC) online account. If you have a permanent, persistent, or prolonged disability, you may qualify for the RAP for Borrowers with Disabilities, which offers additional benefits to help with disability-related expenses.
In addition to the RAP, there are other repayment assistance options available. For instance, if you are a family doctor, resident, or nurse working in a rural or remote area, you may qualify for the Canada Student Loan Forgiveness for Family Doctors and Nurses. Qualifying family doctors could receive up to $60,000 in loan forgiveness over a maximum of five years, while qualifying nurses could receive up to $30,000. Saskatchewan also offers loan forgiveness of up to $4,000 per year for nurses and other healthcare professionals serving in rural or remote communities.
Furthermore, you can customise your payment terms to suit your financial situation. For example, you can increase the number of payments you make each year by switching from monthly to biweekly or weekly payments. This will help you pay off your loan faster and reduce the amount of interest you accrue. You can also adjust the length of your amortisation period, which will increase your monthly payment amount and help you pay off your loan faster with less interest.
If you have a part-time student loan and would like to change your monthly payment, you can contact the relevant student loan service centre. Additionally, if you return to school, you do not need to make payments on your existing student loans, although certain restrictions may still apply to your provincial or territorial loan.
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Interest rates and frequency of repayment
Interest rates on student loans in Canada are either fixed or floating, with both types based on the prime rate. The prime rate is calculated by taking the average of the three remaining rates after ignoring the highest and lowest rates declared by Canada's five largest financial institutions. The interest on student loans accrues daily and is calculated monthly, based on the loan balance. The interest rate charged on student loans may vary depending on the province, as each province regulates them differently. For instance, the interest rate charged on Alberta student loans is based on the prime rate declared by the Canadian Imperial Bank of Commerce (CIBC).
Students can apply for a Repayment Assistance Plan (RAP) to help manage their loan repayments. The RAP offers partial payment coverage with a maximum repayment timeline of 10 years. Additionally, students can apply for interest-only payments or customise their payment terms. It is important to note that missing payments can have consequences, and it is recommended to stay in communication with the relevant student aid service centre to discuss repayment options.
The repayment period for student loans typically starts on the first day of the seventh month after graduation. During this time, the interest rate on the loan may change, impacting the estimated term for repayment. If an individual defaults on their student loan by missing payments for 270 days (approximately nine months), the loan is sent to the Canada Revenue Agency (CRA) for collection. At this point, the individual loses access to further student aid until the loan is brought up to date.
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Frequently asked questions
If you are having difficulty paying your student loans, you can apply for the Repayment Assistance Plan, customise your payment terms, or make interest-only payments. If you do not make payments, your loan will be transferred to a debt collection agency after a certain period of time.
In Canada, student loans are sent to collections after 9 months of missed payments. During this time, the loan provider will attempt to contact you by phone and email.
If you file for bankruptcy within 7 years of finishing your studies, your Canada Student Loan will not be cancelled and you will have to continue paying it back.
