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 loan with other debt? Like most decisions in life, you need to first weigh the advantages and disadvantages to make the right choice for you. 

Why Does Canada Have a Student Loan Debt Crisis? 

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 grace period 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?

Consider Student Loan Repayment Assistance

Before considering debt consolidation, graduates should investigate 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 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.   

Learn 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, 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 debt consolidation loans and debt consolidation programs. 

How a Debt Consolidation Loan Can Help You Pay Off Your Student Loan

A debt consolidation loan involves taking out a loan, usually through a bank, credit union or finance company, to pay off all of your debts, including credit card debt. In order to obtain a debt consolidation loan, however, your credit rating and credit score must be in good standing, which is often not the case for many recent graduates. But if you do manage to secure a debt consolidation loan, you will continue to have access to your credit cards (now all with zero balances), which can make your financial situation much, much worse. If you continue to use your credit cards and rack up credit card debt, it can be extremely difficult (especially for a recent graduate) to keep up with monthly credit card payments, on top of paying back the debt consolidation loan, which in most cases can be quite large. 

Disadvantages of Using a Debt Consolidation Loan to Pay Off Your Student Loan

1. You will owe the 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 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, or more.

Paying Off Your Student Loan Through a Debt Consolidation Program

Taking out a loan to pay off another loan is typically not a strategy for success. Thankfully, there's another option: A Debt Consolidation Program (DCP) with a non-profit credit counselling agency, like 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. They will also 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 in a DCP.

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 

What If I can't Include My Student Loan In A Debt Consolidation Program?

Even if your student loan debt cannot be added to a DCP, your other unsecured debts (i.e., credit card debt, payday loans, utility bills etc.) can, which can make paying back your 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 you succeed, stay on track, and achieve your financial goals. You'll also get a refresher on how to:

1. Build a personal monthly budget 
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 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 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 back on track. Contact us online today or give us a call at 1.800.267.2272.