If you have student loan debt you might be considering debt consolidation to help pay it off. But before deciding what to do, it's important to know exactly what consolidating student loan debt means and if it can really help.
You've made a big investment, and pursuing higher education not only benefits you, the learner, but also the country as a whole. University and college graduates generally contribute more in taxes, rely less on government programs, and are more likely to be employed and volunteer within the community. And what do they get in return for these contributions to society? A boatload of debt.
How Does Student Loan Debt Consolidation Work?
Student Loan debt consolidation is the process of combining two or more government-issued student loan debts into one easy payment. The eligibility of student loan debt consolidation in Canada is determined by the province or territory you reside in.
If you have multiple debts in addition to your student loan debt, debt consolidation might be an option that can save you money. It can also help make managing your other debt much easier if all you have to worry about is just one payment. When it comes to debt consolidation, you have two options: Getting a debt consolidation loan or entering into a Debt Consolidation Program. Both are very different, and in most cases, both require you to have other debt in addition to your student loan. There are several pros and cons to student loan debt consolidation which we’ll delve into after looking at the student loan debt crisis in Canada.
Student Loan Debt by the Numbers
Current estimates place the total amount of Canadian student loan debt at a staggering $22 billion. And tuition isn't getting any cheaper. Recent reports reveal that tuition fees increased by 3% for undergraduate programs in the 2017-18 academic year, putting the annual average tuition for Canadian universities at about $6,500. And other programs have much higher annual costs, such as dentistry ($22,300), law ($13,600), and engineering ($8,000). What really hurts graduates is the interest. Despite a payment and interest-free six-month period following graduation, interest builds and continues to build once payments start. Graduates can choose a fixed interest rate (where the rate doesn’t change for the duration of the loan) or a variable “floating” interest rate which fluctuates.
What is the Government Doing About the Student Loan Debt Crisis?
The Government of Canada understands there is a problem and is taking steps to improve the situation. In 2017, the government of Ontario created the Ontario Student Assistance Program, offering tuition-free education for 210,000 students. New Brunswick followed suit, offering a similar incentive for low-income families. The government of British Columbia began an initiative to make tuition free for former youth in care. While these efforts are moving things in the right direction for those starting their post-secondary education, recent graduates who remain saddled with crippling debt are left to manage on their own.
Why is Student Loan Debt Such a Problem?
Aside from increasing tuition costs and high interest, today’s graduates are entering an unstable job market. They’re not coming out of school and getting a job that provides a reasonable amount of money that would allow them to repay their student debt. Many are having to take unpaid internships, temporary work, or minimum wage employment. (Yup, that barista at Starbucks who brewed your coffee this morning or that Uber driver who got you to work probably has a university degree.) This makes it difficult or downright impossible to pay off student loans within a reasonable amount of time, or make student loan payments on time if you have to pay for rent, groceries, transportation and other monthly expenses as soon as you're done school.
What Students Are Saying
According to Global News Canada, over 75% of Canadian graduates under 40 have some regrets about the money they spent while in school.
- 30% would have lived by a more frugal budget
- 28% would have worked more during school
- 25% would have avoided racking up other debts, such as credit card debt and car loans
While this is some very good food for thought for those entering or still attending college or university, for many graduates it’s already too late. As they say, 'what’s done is done.' So how can a graduate undo what has already been done? A debt consolidation program may provide the answer.
Using a Debt Consolidation Loan To Pay Off Your Student Loan Debt
A debt consolidation loan is usually obtained through a first-tier lender, like a bank or credit union. Generally, you need to have a good credit rating or income in order to obtain a debt consolidation loan. If you can get one, you can use it to pay off all of your unsecured debt, which could include student loans. Then, you pay back the new loan by making one single monthly payment set at a single interest rate.
There are a few pros to wrapping your government-issued students loans into one new loan with a bank or other lender:
- If you fail to pay your student loan, the government can seize your tax refunds, whereas a bank cannot.
- You may be able to extend the period of time you have to pay back the consolidation loan.
- You may be able to find a better interest rate through another lender.
Of course, there are also some cons:
- If you keep your loans with the government, you may qualify for a Repayment Assistance Plan, which isn’t available if you owe a bank.
- Interest that you pay on student loans is often tax deductible; not so when you move your loans to a bank.
- The interest charged on the bank loan could be much higher compared to the interest the government charges on the student loans.
Many people choose to use their new loan to pay off other unsecured debts in addition to their student loans, such as credit cards, payday loans, and outstanding utility bills. This can offer additional relief; however, if you continue to use credit products, like credit cards, after paying everything off with the consolidation loan, it could leave you in a worse financial situation.
After you have paid off your credit cards using the debt consolidation loan, you will continue to have access to them, but they will now have zero balances. Many people then unintentionally make their financial situation much worse, continuing to use their credit cards and accumulating more debt in addition to the loan.
You should also know that it is really up to the lender and creditor whether or not a debt consolidation loan can be used to pay off your student loan debt. But sometimes just being able to address your other unsecured debt can significantly help make managing your student loan debt a lot easier.
Can a Debt Consolidation Program Help Me With My Student Loan Debt?
A Debt Consolidation Program doesn’t involve taking out a loan. Instead, it's an arrangement where a certified Credit Counsellor will negotiate with your creditors to either stop or reduce the interest on your unsecured debt, which includes credit cards, payday loans, outstanding utility bills, etc. Because student loan debt is considered unsecured debt, there's a chance it can be rolled into the Debt Consolidation Program. But this is usually only the case if the student loan has already gone to collections. Again, it's a case-by-case basis. However, by lowering or reducing interest on your other debt, you'll have more money left over to pay off your student loans.
If you decide that a Debt Consolidation Program is your best option, your Credit Counsellor will propose a new repayment schedule to your creditors that works within your budget. This will let you see how you can realistically pay off your debt over time. Your Credit Counsellor will also negotiate with your creditors to stop collection calls and stop or reduce the interest on your debt. Once you're 100% debt-free, your Credit Counsellor can also teach you how to rebuild your credit. Finally, they'll provide you with money management and budgeting tools to help ensure you never find yourself in debt trouble again.
Get help managing your student debt
If you’re a recent graduate, congratulations on your achievement! If you find that you’re struggling to pay off your student loan due to other debts, such as credit cards and cellphone bills, we may be able to help. Even if a Debt Consolidation Program doesn't end up being the right fit for you, we can still offer free advice, tips and referrals for getting your finances back on track. Contact us online today or give us a call at 1-800-267-2272.