Student Loan Debt: Can Debt Consolidation Help With Student Loans?

25 years ago, 33% of Bachelor’s Degree students graduated with student debt over $25,000. In 2020, that number was updated to 48%. 

Not only are more Canadian post-secondary students graduating with debt, but their debt loads have also increased. In 2020, the average amount of debt Bachelor’s students graduated with was $30,600, up from $20,500 in 2000.  If you are one of these students, we understand that these large sums of money can be challenging to repay—especially if you’re new to your career. 

In this article, we’ll explore student loan options and strategies to pay off your student debt. We’ll also discuss whether debt consolidation can help with student loans.

Understanding Student Loans in Canada

There are three main types of student loans in Canada: 

Federal Loans

The government offers fixed or variable interest rate loans through the Canada Student Financial Assistance Program (CSFA Program). This program is available for students who:

1. Are from low- or middle-income families

2. Have dependants

3. Have disabilities

The federal government has several loan and grant programs for students, including:

• Canada Student Grants (awarded 558,000 students over $3.5 billion in financial aid in 2022/23)
• Canada Student Loans (provided $3.1 billion in interest-free loans to over 566,000 students in 2022/23)

Provincial Loans

These loan and grant programs are specific to each province and territory and have varying interest rates. The Government of Canada website has the most up-to-date loans and grants available for your region. 

Private Loans or Student Lines of Credit

Private loans are obtained through banks or other lenders if the federal and provincial loans aren’t enough to cover tuition or if you do not qualify. They often have higher interest rates than government loans.

You can access a student line of credit through a bank or credit union. To be eligible, you need proof that you’re a part-time or full-time student at a recognized Canadian post-secondary institution. A co-signer may be required for your application. 

Interest rates are typically Prime + up to 1%, with varying terms and conditions based on the field of study and expenses. For example, with CIBC, you can get up to $350,000 at Prime -0.25% if you’re studying Medicine. 

Unlike government loans, which start accruing interest six months after graduation, interest for a private loan or student line of credit begins immediately on the amount borrowed.    

What Exactly is Debt Consolidation?

Debt consolidation combines multiple debts into a single payment. If you have multiple debt payments, such as private loans, lines of credit, and other unstructured debt like credit cards, debt consolidation can help you manage everything, including consolidating at a lower interest rate.

There are two main debt consolidation strategies:

The first option is through a debt consolidation loan, provided by banks, credit unions, and finance companies. This combines all your loans into one from a single lender with a unified interest rate.

The second is through a Debt Consolidation Program (DCP), which is an arrangement made between your creditors and a non-profit credit counselling agency to simplify your debt payments and reduce the total interest owed. Note, that student loans cannot be included in a DCP unless it has already gone to collections. Student lines of credit can be included; however, this may affect the co-signer on the account.

Credit Canada is a non-profit credit counselling agency with almost 60 years of experience, providing judgment-free credit counselling. Speak with one of our certified Credit Counsellors to see if consolidating your student loans is the right choice.

Consolidating Student Debt: When It’s Worth Considering

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 and student lines of credit, however, will never be automatically consolidated.

Since federal and provincial student loans already come with low interest and flexible repayment programs, the question becomes: Why would you consolidate your student debt at all? Some reasons include:

1. You’ve left the government loan system. Once you stop making payments or default on your federal or provincial loans after nine months, they may be sent to collections through the CRA or a private collections agency. If you cannot bring the loan back into good standing, consolidation may be a useful tool to regain control of the debt and stop further collection action.

2. Interest savings on private loans. If you have multiple private debts, you might consolidate them into a single loan at a better interest rate.

When deciding whether to consolidate your student loan after graduation, we usually advise our clients to speak to their financial institutions about options for consolidation. Before making a final decision, consider the interest rate on your student loan against the loan being offered by your financial institution. 

Steps to Take Before Consolidating

Here is a closer look at your options for consolidation. 

Assess Your Financial Situation

Look at how much you still owe on your student loans. You can access your account details, including the balance owing, on the National Student Loan Service Centre (NSLSC)’s website. This is also a good place to learn about your account fees and rules. 

Next, create a budget. Most student loans come with a 6-month grace period after graduation, so use this time to budget and plan, rather than rushing into consolidation. Look at your projected expenses, income, and debt loads (from loans and any other sources). This will help you better understand how much you can afford to pay towards your loans every month. 

Download the free Budget Planner to help you track your income, expenses, and debt payments. 

Consult with a Credit Counsellor

If, after creating a budget, you notice that you have a high debt-to-income ratio, not enough money left for essentials, or unaffordable monthly payments that leave you feeling overwhelmed, consider talking with a Credit Counsellor. They can help you understand your consolidation options and see if they’re right for you. 

In many cases, if your outstanding loan is small, you are eligible for government repayment assistance, or are still within your grace period, it may be best to keep things as is, as fees will likely significantly add to your payments. 

If you want to consolidate your loans, your Credit Counsellor can help you understand your options. Ask about realistic monthly payments and how long until you’ll be debt-free. 

Pros and Cons of Consolidating Student Loans

In most cases, it would not make sense to consolidate your student loans, as federal loans are interest-free and provincial and student lines of credit already have relatively low interest rates. In the event that your student loan is in collections, you have private loans, or other outstanding debt, however, there may be some benefit to consolidating them, either with a DCP or a debt consolidation loan. 

Here are the pros and cons of each option:

Pros of Consolidating Your Loans

• One lower monthly payment.  With a lower combined interest rate, you may save money on payments and pay less interest.

• No more collection calls. When you enter a consolidated debt program, collection calls will stop as long as you keep making your payments. 

Cons of Consolidating Your Loans

• Potential fees. Transferring or early repayment of some loans may incur extra fees and administrative charges.

• Credit impacts. You may notice a temporary drop in your credit score, especially if you have a hard check done on your credit score for the new loan.

• Co-signers are affected too. If your loan or line of credit was co-signed by a parent, relative, or spouse, their credit will be impacted if you consolidate your loans. 

Speaking with a Credit Counsellor can help identify potential risks of consolidating your loan debt.  

Alternative Solutions to Manage Student Loan Debt

Before choosing student loan consolidation, graduates should investigate other forms of debt support that may be available to see if they make sense for their financial situation:

Repayment Assistance Plan (RAP)

Canada Student Loans give you a six-month grace period after graduation. If you've maxed out your grace period and can't afford to make payments or have begun the repayment process but have fallen behind, you can apply for the Repayment Assistance Plan (RAP) through the National Student Loan Service Centre (NSLSC) or by calling them at 1-888-815-4514. RAPs can reduce your loan payments or halt them entirely, depending on your financial situation. For individuals, repayment may not be required until you are earning at least $40,000 per year.

You must reapply every six months to be eligible for this program, which will:

• Pay your interest owing on federal loans (the part that the reduced payment doesn’t cover)

• Help pay down the principal and any remaining interest after 60 months of RAP or 10 years after you finish school. 

Once on the RAP, you can’t apply for additional federal student loans. The RAP program is maxed out at 10 years (or 15 for students with disabilities). 

Consumer Proposals

A consumer proposal can help you eliminate interest or amounts owing for many loan types, including student loans. However, this will have a significant impact on your credit history for at least 7 years or longer, so it shouldn’t be a first choice. 

In some cases, your student loan may not be dischargeable until a minimum of seven years have passed from your official end-of-study date or the final day you attended classes, if you did not complete your program. Your Credit Counsellor can advise if your student loan debt can be included in your consumer proposal and the impacts of that decision. 

Bankruptcy Considerations

If other debt consolidation or payment strategies are not available to you, your last resort may be declaring bankruptcy. 

Bankruptcy may be right for you if you’ve :

• Been out of school for over 7 years with student loan debt remaining (called the “seven-year rule”) 

• Acted in good faith, but can’t afford to repay your loan due to financial hardship 

• Explored all other options available to pay your debts (including debt consolidation)

If you’re considering bankruptcy, talk to a Credit Counsellor for guidance. Consider bankruptcy or a consumer proposal if:

• Your monthly expenses are more than your monthly income.

• You have been sued by a creditor.

• Your debt continues to grow.

• You are receiving collection calls daily about your debt that includes student loans eligible for consumer proposal or bankruptcy. 

Ready to Tackle Your Student Debt? We’re Here to Help.

Graduating is one of life’s most memorable and rewarding experiences. Don’t let your student debt cast a cloud on your celebrations. It’s normal for those with student loans to owe money upon graduation, which can take several years to repay. 

Federal loan programs will give you a grace period before you start making payments, so take advantage of this time to get situated in the job market. 

Consolidation might be an attractive option to help you repay your student loans, but always do your research and understand all your options before making this choice. 

Your Credit Counsellor at Credit Canada can help you make the best choice for you and your future. Contact us or call 1 (800) 267-2272 for a free one-on-one counselling session or chat with our AI-powered debt management agent Mariposa for instant support.