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 graduates desperate for student debt help. Many struggling graduates have begun considering consolidating or refinancing student loans. But, is it a good financial maneuver? We look at the advantages and disadvantages, so you can make the choice that’s right for you.  

Why Does Canada Have a Student Loan Debt Crisis? 

So, how did we get here? Well, for years, tuition costs steadily increased, and many loans had relatively high interest rates. In addition, graduates were entering an unstable job market, where their six-month grace period on student loan repayment did them little good. Many graduates, unable to secure high-paying jobs, were forced to take unpaid internships or minimum wage employment to survive, making it nearly impossible to pay their loans’ monthly minimums.

The Government of Canada has recognized the student loan debt crisis and is taking steps to improve the situation. They’ve developed numerous tuition-free education programs for low-income families, and Ontario recently slashed tuition costs by 10% and will freeze that rate through 2021. While this is all well and good for new students, it is of little comfort to graduates seeking student loan debt relief now.

Different Types of Canadian Student Loans

First, it’s important to understand there are three types of student loans in Canada:

1. Federal loans – fixed or variable rate government loans offered through the Canada Student Loan Program (CSLP). 
2. Provincial loans – specific to each province or territory, with varying interest rates.
3. Private loans – obtained through banks or other lenders if the federal and provincial loans weren’t enough to cover tuition; these often have higher interest rates.

In some provinces, federal and provincial loans will be consolidated or integrated automatically upon graduation so that you only make one payment that goes toward paying off both loans. In other provinces, however, they are not consolidated – so you must be sure to repay both. CIBC has a comprehensive list you can check out here to learn which provinces automatically consolidate your federal and provincial loans when you graduate Private loans, however, will never be automatically consolidated. 

How Does Student Loan Refinancing and Debt Consolidation Work?

While the terms are often used interchangeably, student loan refinancing and student loan debt consolidation are different.

• Refinancing is paying off one single loan with a new loan that has a lower interest rate or better terms.
• A debt consolidation loan involves combining multiple debts or loans into one new loan set at a lower interest rate or better terms. For example, if you have a federal loan, a provincial loan, and a private loan, which make up your total student loan debt amount, you may look to find another lender that will combine them all into one new loan set at a lower interest rate. 

Graduates may want to consider either refinancing their student loan or obtaining a debt consolidation loan if they have:

• Made some on-time student loans payments already, showing potential lenders that they’re reliable
• A good credit score (read more about credit scores here)
• A stable and well-paying job
• A co-signer with good credit and/or a good job

Some graduates who are able to secure a debt consolidation loan also use it to pay off other unsecured debts, like credit cards or payday loans. However, there are some risks in doing so if they continue to use their credit cards (now with zero balances). It’s then extremely difficult (especially for a recent graduate) to keep up with monthly credit card payments and the new loan payments.

Disadvantages of Student Loan Refinancing or Using a Debt Consolidation Loan

While refinancing a student loan may benefit you if you’re getting a better deal on a private student loan from another private lender, there are disadvantages transferring federal or provincial loans to a private lender, either through refinancing or debt consolidation:

1. You will 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 will 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 will likely be charged a higher interest rate. You may like the idea of managing just one monthly payment, but if you have poor (or no) credit history, the bank’s interest rate and fees will likely be higher than the interest rate the government is charging you on your student loan.
4. You will pay more interest over time. While debt consolidation may lower your monthly payments by stretching them out over a longer period of time, it also means you’ll be paying more interest over time. Plus, having student loans hanging over your head for 20 years could potentially hinder your ability to buy a home, get an auto loan, or more.

Consider All Your Student Loan Debt Help Options

Consider Student Loan Repayment Assistance 

Before considering debt consolidation or student loan refinancing, graduates should investigate other forms of help that 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 might be able to reduce your loan payments or halt them entirely depending on your financial situation. You can learn more about RAPs, your eligibility, and how to apply by clicking here.   

A Debt Consolidation Program

Taking out a loan to pay off another loan typically isn’t a strategy for success. Thankfully, there's another option: A Debt Consolidation Program with a non-profit credit counselling agency, like Credit Canada. 

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 stop or reduce the interest on your debt. They will also roll all your unsecured debts (i.e., credit card debt, outstanding cell phone bills, payday loans, etc.) into one lower monthly payment. 

But there is one caveat when it comes to student loans—often, the loan must already be in collections for it to be included in a Debt Consolidation Program. However, even if your student loan debt cannot be included, your other unsecured debts can, which can make paying back your student loan more manageable. 

Budgeting and Money Management Skills

In some cases,  maybe all you need is just some financial coaching. Credit Canada has certified Credit Counsellors who can work with you to help you achieve your financial goals while developing better money management and budgeting skills. In addition to student loan debt advice, they can also show you how to make your money work for you through budget planning and expense tracking. In fact, there’s even a free Budget Planner + Expense Tracker tool that you can download now.

How Do I Know if My Student Loan Is in Collections?

If you don't know whether or not 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 

Financial Advice for Graduates Is Just a Phone 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 card debt and outstanding utility bills, we offer student loan debt help. 

Even if a Debt Consolidation Program doesn't end up being the right fit for you, we can still offer you free advice, tips, and referrals to help you get your finances back on track. Contact us online today or give us a call at 1.800.267.2272.