What Happens if You Can’t Afford Your Canadian Student Loan Payments

You've graduated high school and been accepted to a university or college. Congratulations! Higher education is a requirement for many jobs, especially the more lucrative ones, and aside from that it's a great experience in learning and growing (sexually and drug-experience-wise) for many people. But how will you pay for this incredible opportunity?

Because Canadian universities still charge tuition (which they don't need to do!) you will need several thousands of dollars each year in addition to your living costs. Some people are lucky enough to have parents with the means and willingness to cover their education, while others work to pay their way through school. There are also scholarships and bursaries, of course, but for many of us, at least some of the money for our education will come from student loans. The average student debt load upon graduation is about $27,000.

Students can get government loans from either their province, the federal Canada Student Loans Program (CSLP), or both, depending on the province or territory. (Private loans from banks are also available, but data is harder to find on how many Canadians are borrowing from them and how much they're borrowing.) Loans are interest-free until you graduate or leave school, or if you switch from full- to part-time status. Upon graduating or leaving school, everyone has six months before they need to begin repaying their government loan.

If you're one of the growing number of people who faces uncertain employment or low-wage work, though, repaying your student loan can be an intimidating thought. We spoke to Lance Lochner, a professor of economics at the University of Western Ontario, about what happens if you don't pay your loan and what your options are.

Lochner said that the horror stories we hear about American students leaving school with six-figure debt loads are actually quite rare in the US, and almost unheard-of in Canada (though not that uncommon for specialized programs like medicine or dentistry). However, a much more common $20,000 debt is going to be difficult to repay if you're working at Starbucks between freelance gigs. So what do you do?

Don't panic and decide to just ignore your loan!If you fail to make nine consecutive payments on your loan, it will go into default. That's very, very bad. Lochner said there's some discrepancy between what can happen and what does happen, but the can is pretty scary: the government can send debt collectors after you, take you to court, and seize your income-tax returns. And, of course, your credit will be ruined.

The good news is that CSLP has a program designed specifically for this situation. It's called the Repayment Assistance Plan (RAP) and if you're worried about your financial situation it is a godsend. You tell CSLP how much money you're making, and if it's under a certain threshold—around $20,000 for a single person with no children, according to Lochner, which is below the $22,700 poverty line—you don't have to make any payments on your loan. No one is entered into the program automatically, and you have to resubmit your information every six months, but if you qualify for a zero-dollar payment, CSLP will cover your interest over those six months. So while the amount you owe isn't going down, it's also not going up.

"It's really a big reduction for people earning less than $30,000, less than $20,000," said Lochner. Unless your debt load is especially high, RAP mostly benefits people making under $25,000. Once your income starts moving past that, into the $30,000-$40,000 per year range (or higher, if you should be so lucky), your payments are scaled according to your income up to about 20 percent. If they get large enough, you can also move out of the program and just make the regular payments calculated for you by CSLP (those are based on taking ten years to pay off your loan).

If you're low-enough income for long enough, you'll move into "stage two" of the repayment assistance process. In stage two, Lochner explained, it's not just your interest but your principal that RAP helps you pay down. This happens once you've been on reduced payments for five years or, if that doesn't happen, after ten years of you paying down your debt (and if you're approved for the Repayment Assistance Plan for Borrowers with a Permanent Disability). From the CSLP website:

An important note for potential returning students: once you enter stage two you are no longer eligible for education funding from the government.

After 15 years, another happy milestone awaits: any outstanding debt is forgiven. Or, more accurately, the stage two payments made by the government are structured so that you have no debt after 15 years. So if you take one thing from this piece, make it this: all you have to do is be miserably poor for 15 years and you won't have to pay a dime on your student loans!

But, as Lochner said, "it's not a great outcome that anybody wants." Obviously the government doesn't want everyone getting free money, and more obviously, nobody wants to spend more than a decade living below the poverty line. As tempting as it might be in theory, there aren't going to be hordes of post-grads purposely living on Wal-Mart wages for a decade and a half.

But it is comforting to know that in Canada, there are ways to mitigate your student loan payments and the debt won't be hanging over your head for the rest of your life.

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