Should I Consolidate My Student Loan Debt?

Canada is facing a student loan debt crisis, with estimates placing the total amount of Canadian student loan debt at over $28 billion, leaving many former students wondering: Should I consolidate my student loans? Like most decisions in life, you need to first weigh the advantages and disadvantages to make the right choice for you. 

Adding insult to injury, recent reports also 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.

While the government gives students a six-month window after graduating before loan repayment kicks in, many Canadians are unable to secure a high-paying job within that time frame, leaving them to struggle to make payments. While the Canadian government is taking steps to improve the situation, for those struggling to repay their loans and make ends meet, it’s not happening fast enough. This has many former students wondering: should I consolidate my student loan debt?

Considering Student Loan Repayment Assistance

Before considering debt consolidation, graduates may want to see what other forms of help may be available to them through the government. If you've maxed out your six-month grace period and simply can't afford to make payments, or if you've begun the repayment process but have fallen behind, you can apply for a Repayment Assistance Plan (RAP). RAPs may be able to reduce your loan payments or halt them entirely depending on your financial situation. You can learn more about the eligibility requirements and download the RAP application form here.  

Understanding How Debt Consolidation Works

If you're not eligible for a RAP yet continue to struggle financially, debt consolidation may be a good option. Debt consolidation is the process of combining two or more debts into one payment. If you have multiple debts on top of your student loan debt, consolidation might be an option that can save you money and make managing your other debt much easier. But like most decisions in life, deciding whether to consolidate student loans requires weighing the advantages and disadvantages and understanding the differences between loans and programs. 

Debt Consolidation Loans

A debt consolidation loan involves taking out a loan to pay off all of your debts, usually through a bank, credit union or finance company. However, to obtain a debt consolidation loan your credit rating and credit score must be in good standing, which is often not the case for many recent graduates. If you do manage to secure a loan, you'll also continue to have access to your credit cards, which can make the situation worse because of the temptation to use them and accumulate more debt, and that's on top of having to pay back this new (huge) bank loan. Four more reasons to just say 'no' to student debt consolidation through a bank loan:

1. You owe a bank, not the government. If you keep the loan with the government, you may be eligible for student loan debt relief programs that wouldn't be available to you if you went to a bank lender. You can read more about these programs and your eligibility on the Government of Canada website.
2. You lose tax deductions. Interest on student loans is tax deductible, offering you annual savings that wouldn't be available with a bank loan. 
3. You pay higher interest. You may like the idea of managing just one monthly payment, but if you have poor (or no) credit history, the bank’s interest fees are likely to be higher than the interest the government is charging on that debt.
4. You pay more interest over time. While consolidation may lower your monthly payment by stretching it out over a longer period of time, that also means you’ll be paying more interest over time. In addition, having student loans hanging over your head for 20 years could potentially hinder your ability to buy a home, get an auto loan, and more.

Debt Consolidation Programs 

Taking out a loan to pay off another loan is typically not a strategy for success. Thankfully, there is another option: A Debt Consolidation Program (DCP) with a non-profit credit counselling agency, like yours truly, Credit Canada.

A DCP doesn’t involve taking out a loan. Instead, it's an arrangement where a certified credit counsellor will negotiate with your creditors to stop or reduce the interest on your debt, and roll all your debts into one lower monthly payment. However, there is one caveat when it comes to student loans—often, the loan needs to already be in collections for it to be included into the Debt Consolidation Program.

If you don't know if your student loan has already gone to collections, you can call the following government offices to obtain that information: 

• Provincial Student Loans: Collection Management Unit for the Ministry of Finance, 416-326-0500 
• Federal Student Loans: CRA Collections Service—Canada Student Loan Centre, 1-866-336-7565 

But even if your student loan debt can't be added to a DCP, your other unsecured debts—such as credit cards, car loans, payday loans, and utility bills—can, making paying back the student loan much more manageable. And that's not all... With a DCP, your credit counsellor will work with you every step of the way to make sure succeed and stay on track towards your financial goals. You'll get a refresher on how to:

1. Build a personal monthly budget and stick to it
2. Track and control your spending
3. Set financial goals you can achieve
4. Make your money work for you

Financial Advice for Graduates is Just a Call Away 

If you’re a recent graduate, congratulations on your achievement! And if you’re struggling to pay off your student loan due to other debts, such as credit cards and car loans, we can help. Even if a DCP doesn't end up being the right fit for you, we can still offer free advice, tips and referrals for getting your finances on track. Contact us online today or give us a call at 1.800.267.2272.