Understanding Student Debt Consolidation: A Comprehensive Guide
Student debt has become a significant concern for many young individuals in Canada. A rising number of students are finding it challenging to repay their loans, resulting in an increased number of insolvencies involving student loans. The predicament is rooted in the high tuition fees for both undergraduate and graduate courses, coupled with a turbulent job market.
In light of these alarming trends, a critical question arises: How Can I Consolidate My Student Debt? This article delves into various student loan consolidation options available to Canadian students.
The Current Scenario of Student Debt in Canada
In Canada, the average tuition cost for an undergraduate course is $6,838 per year and $7,086 for a graduate degree. These high fees often compel students to rely on loans, leading to substantial debt post-graduation.
Statistics Canada’s actuarial report on student loan write-offs assumes a net default rate of 9% on consolidated federal and provincial student loans. However, it is essential to realize that this figure doesn’t fully represent the number of students battling loan repayments. The report reveals that nearly 15% of student loans go into default, although some are “rehabilitated” through the Repayment Assistance Plan.
What is Student Loan Debt Consolidation?
Debt consolidation enables you to merge several debts into a single one. The primary advantage of this strategy is that it can lower interest costs and simplify repayment by mandating a single, hopefully lower, monthly payment.
However, student loan debt consolidation presents certain complexities. The first consideration is the type of student loan debt you have. Are you seeking assistance repaying federal and provincial student loans, or are you also grappling with private bank loans, credit cards, or lines of credit? The second issue is that specific programs have unique rules for consolidating student loan debt.
Debt Consolidation Loans: Pros and Cons
A debt consolidation loan involves securing a new loan from a bank, credit union, or financing company to pay off your existing student debts. It’s crucial to ensure that you benefit by obtaining a lower interest rate when consolidating any debt with another lender.
However, for most individuals struggling with student debt, a new consolidation loan may not be the best option due to several reasons:
- A good credit rating is required to qualify for a debt consolidation loan.
- Assets may need to be pledged as collateral, which most student debtors might not possess.
- The tax deductions on student loan debt interest may be forfeited upon transferring government student loans to a private lender.
- Most banks and lending companies hesitate to consolidate government-guaranteed student loans.
If you possess poor credit, the interest rate charged on a consolidation loan for student credit card debt and lines of credit may be unaffordable.
Debt Management Plan or Debt Consolidation Program
Credit counselling agencies offer a program known as a Debt Management Plan (DMP), sometimes referred to as a Debt Consolidation Program. The agency cooperates with you to collect the full amount you owe on behalf of the banks.
However, a DMP may not be an effective solution for student loan debt due to several reasons:
- Typically, the government does not cooperate with credit counsellors.
- If your government student loans are in collections, you should explore the government’s Repayment Assistance Program.
- If the RAP program has failed you, a DCP or DMP might not offer the relief you need.
- A DCP can handle small credit card debts, some outstanding bill payments, and a small bank loan, but it requires 100% repayment of these debts.
- A DCP does not cover payday loan debt.
Consumer Proposal Program
A consumer proposal program, another form of debt consolidation program, allows you to propose repaying a portion of what you owe and make one monthly payment to your trustee, who then distributes your payments among all your creditors.
The advantage of a consumer proposal is that you also obtain debt relief by repaying less than you owe. Consumer proposals are effective in dealing with credit card debts, payday loans, bank loans, and, in certain circumstances, student loan debt.
To automatically eliminate your student debt through a consumer proposal, you must have been out of school for seven years. Even if your student loan debt does not meet the seven-year limitation, consolidating and settling other unsecured debt through a consumer proposal can make repaying your student loan debt significantly easier.
Weigh Your Options
Both a consumer proposal and a DMP impact your credit report similarly, so the choice between these two consolidation options for student debt boils down to a financial decision about how much you can afford to repay.
To explore all your options, consider contacting a local Licensed Insolvency Trustee for a free, no-obligation consultation. They can provide invaluable advice on How Can I Consolidate My Student Debt, and steer you towards the most suitable solution for your circumstances.
