What Should You Do When Student and Credit Card Debts Spiral Out of Control?

Doug Hoyes
by Doug Hoyes September 23, 2016 / No Comments

Post-secondary education is expensive. Gone are the days when a summer job could cover tuition and books. Today’s students and graduates are forced to rely on loans and credit cards while working during the school year. And even then, students requiring a Canada Student Loan now graduate owing an average of $28,000.

Add in the difficulty of finding a job, underemployment and the cost of living, and graduates may once again turn to their credit cards to make ends meet. Life doesn’t stop just because you have student debt: You may get married, start a family, lose your job or become ill, and sometimes those credit card debts and student loan payments become unmanageable. 

What can you do?

If you’re struggling to keep up with your student loan payments, you can renegotiate your payment terms by asking for a lower monthly payment. While this may help you balance your budget, you’ll pay more interest over the length of your student loan. You could also qualify for government repayment assistance programs. However, you’ll have to meet certain conditions to qualify.

If your credit card debt is out of control, that’s another matter. You can try transferring your balances to a lower rate credit card or bank loan. But if you have a high overall debt load, this may not be a feasible way out.

If you find you’re unable pay your combined credit card and student loan debts, visit your local licensed insolvency trustee for advice. They’ll be able to review your finances and walk you through your options. Depending on the type of loan and your unique financial situation, they’ll present you with different choices for dealing with your student loan debt.

You have a student line of credit

If your student loan is a line of credit through a private financial institution and not guaranteed by the government, it can be included in a bankruptcy or a consumer proposal along with your other unsecured debts. As a private loan, it’s no different than any other loan. As such, there are no restrictions regarding its eligibility for discharge. Depending on which option makes the most sense for your situation, filing bankruptcy or a consumer proposal will significantly reduce your monthly payments, allowing you to rebuild your finances.

Be sure to speak with a trustee if there’s a co-signer on your line of credit. Filing for insolvency will shift the responsibility to repay the loan from you to your co-signer. That means they will become 100% liable for the full amount owed. If you file a consumer proposal or bankruptcy, you must include your line of credit with the rest of your unsecured debts.

You have a government guaranteed student loan

If you have a Canada Student Loan or provincial guaranteed loan like OSAP, its eligibility to be discharged depends on the date of when you ceased to be a student. If you’ve been out of school for seven years, your student loans are eligible and can be included in your insolvency filing.

If it’s been less than seven years since you left school but more than five, you can apply to have your student loans discharged early under the financial hardship provision. To qualify, you must show you used the loan in good faith and that repaying your loan would cause undue hardship.

If it’s been less than seven years since you’ve ceased to be a student, your student loans are not eligible to be discharged. However, you could still benefit from filing a bankruptcy or consumer proposal. Eliminating all your other unsecured debts like credit card debt in a personal bankruptcy or a proposal could give you enough breathing room financially to make your student loan payments. With the debts eliminated, you’ll have a fresh start to balance your budget and rebuild your credit and finances.

The best option and legalities can be complicated, so it’s always a good idea to meet with a licensed insolvency trustee to learn more about your options.

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Flickr: Christian Schnettelker