If you have student loans you know that managing this debt can be a challenge even at the best of times. Faced with difficult times like we are experiencing now, managing your student debt may seem nearly impossible. To help alleviate the burden of student loan debt, the federal government recently announced the following assistance. For more information, visit the National Student Loans Service Centre.
Will this government assistance be enough? We know that Canadians under 35 have been struggling with student loan debt for years. Our 2020 Affordability Index, which was released in the middle of a tough pandemic year, revealed that a significant number of younger adults said paying off their student loan debt is their toughest financial challenge. Unfortunately, along with student debt challenges, there’s the financial hit that this demographic has experienced due to COVID-19. A recent Ipsos survey found that about 4-in-10 Canadian adults under 35 say their financial situation has declined in the past year.
This episode of the BDO Financial Wellness Podcast features highlights from a previous conversation about student debt we had with BDO Licensed Insolvency Trustee Ilan Kibel. Ilan’s insights and advice about how to manage student loan debt are more relevant than ever, especially considering the serious financial hurdles that so many younger Canadians continue to face. You can read the transcript below to learn more about our conversation.
Are you interested in learning more about student debt and your debt relief options? Read more here.
Did you know that carrying too much debt can have an effect on your emotional well-being? Recognize the signs here.
Hello, you’re listening to the BDO Financial Wellness podcast and I’m your host Tera Beljo. Much has changed in the world since our 2017 survey about student debt. Five years ago, we found that three-quarters of post-secondary grads regretted their student loans. And about 60% of grads under 40 were still paying off their student debt. While we weren’t surprising results, they were concerning. And the student debt struggle continues. The difference is the financial challenges for Canadians under 35 haven’t gotten better. In fact, they continue to increase.
Since COVID, young Canadians report the worst economic and emotional stress of any age group. Canadians under 35 are disproportionately losing full-time jobs, short-term jobs and paid hours. And then there’s the pandemic. Generally, younger adults have been last in line to get vaccinated so may not benefit from looser restrictions for vaccinated Canadians. One quote I read recently said, ‘It makes it very complicated to have strategies for opening things to only people who have vaccines. Because then you disadvantage a group (younger people) who have given so much over the past year, and potentially will suffer economically for the rest of their lives.’
Throughout all of this, there’s still the fallout from overwhelming student debt. Young people need higher education to get good jobs; the end result is student loans that often take decades to pay off. A few months ago, I had the chance to sit down with BDO Licensed Insolvency Trustee Ilan Kibel to discuss student debt, and I think now is a great time to revisit some of the things he said in that podcast.
So, based on Statistics Canada information, the average student loan debt is approximately about $28,000 in Canada. We’re finding that there are a lot of grads in their 30s and 40s, based on a survey, we did back as BDO in 2017, that are still paying off their student loan debt. So, it’s a number of years past their education and they’re still struggling with the debt. There were a lot of things that came out of that when we interviewed the people saying they wished they had made certain financial sacrifices to avoid being in this debt. And they wouldn’t have had to track this (student) debt for the 10 years through their life.
Also, our survey spoke about the need to plan ahead, like getting part-time jobs and summer jobs, certain things like that to help them in dealing with their debt. For Canadians in their 30s and 40s, the student loan debt is adding to their financial stress. It’s affecting milestones. People are delaying having children and struggling, obviously, to buy a home. House prices are up, but they’ve got this additional debt sitting there. And then I suppose saving for retirement, people are pushing that retirement goal further and further down the road.
You just gave a dialogue of my life!
Fair enough. And that’s a thing we’ve seen from everybody. It’s just getting worse and worse. COVID-19’s resulted in reduction of income; a lot of people have lost their jobs. The fear is, are they going to get these jobs back? There’s doubt that that’s going to happen or not and how many (jobs) are going to come back. So, there’s a lot of uncertainty out there. We’ve just recently done an affordability index called the BDO Affordability Index 2020. And we’re finding the Gen Z and Millennials are struggling to repay the student loan debt. Nearly 40% of people between 18 to 24 years old and a quarter of the 25- to 34-year-olds consider paying off student loan debt as their most significant financial challenge, which is very interesting today.
As Ilan mentioned, results from the BDO Affordability Index, released in October 2020, found that a significant number of under 35s found repaying student loans to be their biggest financial hurdle. Even though, at the time, credit card companies were deferring credit card payments, landlords were deferring rent, and they had just finished a 6-month period of student loan payment deferrals. Today, most government assistance has ended (CERB, credit card and mortgage deferrals). Intergenerational tensions, which already existed, have worsened. Rising housing prices have priced younger Canadians out of the market. They’re calling it urban flight.
So, what we find is that one quarter of the 18- to 34-year-olds have overwhelming debt due to the COVID 19 pandemic. There’s not a lot of job availability given the fact that the restaurants and bars and all that are closed. So, a lot of people have less disposable income or no income at all to service student loan debts and their regular debt with credit card companies. One third of the 18- to 34-year-olds have put off paying credit card debt because they can’t afford it. And that’s significant. It’s been helpful that the banks have delayed the payment. I think people need to be very conscious and wary that it’s a delay. It’s not writing off your payment. It is eventually going to come back, and people are going to have to deal with that. So, they haven’t forgotten about the debt, but they’re just giving people time.
They (banks) are being nice to people for the time being, in not demanding those payments. The COVID-19 hardships, as I say, are causing income challenges. You’ve got your rent; people can’t afford to pay rent. So, they’ve got a lot of these stresses that are causing uncertainty, and very stressful situations. Interesting that 4-in-10, Generation Z (those people between 18 to 24 years-old) have experienced layoffs. And we’ve seen that a lot of these individuals are supplementing incomes with bar work, restaurant work, servers. They can’t do that (now), especially in a lot of the regions going into Phase Two where these lockdowns are happening. So, it’s getting tougher and tougher and who knows how long this can go on for and how long we can afford it to go on for. So that’s becoming a thing.
Savings and debt challenges are real. They’re affecting everybody. It’s not a single person, it’s basically right across the nation and people aren’t able to, as I say, enjoy the day-to-day things because they can’t afford to. And when you get into the older Generation X, people in my age group range, they’re saving less. And honestly, they are also looking at the inability to save for future retirement. I think retirement for a lot of people is way delayed or they believe it may never happen.
So now let’s talk about the student loan assistance and what’s new since we last recorded the podcast. So far, interest rate on the federal portion of student loans have been frozen at 0% for two years and will continue until March 31, 2023. The 2021 federal budget includes the proposal to defer federal student loan payments for Canadians making $40,000 or less (an increase from existing limit of $25,000). There’s also an opportunity for young Canadians to divert money into long-term savings plans like retirement. Or an opportunity to deal with high-interest debt now and focus on student debt after the deferral period.
Here are a few tips from Ilan for managing your student debt.
So, the old thing is budgeting. Budgeting and tracking your spending. So, I say to people, “It’s great to set up a budget, which is most probably the easiest step, it’s now tracking that budget.” Actual spending…what are you spending your money on? And then when you look at that is in least tough times where you may not have that disposable income, the debts have accumulated the compound interest built up. You got to look at, start juggling and figuring out where can you cut back on certain expenses? The non-essential expenses, do you need five cups of coffee a day or could you make three at home? You basically look at earning additional income if that’s possible. We know it’s a lot more difficult right now, given the COVID-19 not many things open. It may mean moving back in with your family, to reduce some income. Finding a roommate, to share living expenses, certain things like that are definitely what you can do on your own to help you deal with this.
And I think it’s going to give you a good understanding and set up for the future on where you really spending your money and what you want your future to look like. The other options are what we call debt consolidations. So, you could do your budget. You’ve gone through everything you felt you’ve cut out everything you can. You’ve got to be critical when you do that, but you may still get to the point where you say, “I just can’t afford these high 25–28% interest credit cards.” Then it’s looking at debt consolidation. So basically, what a debt consolidation is you approach your bank, financial institution, typically a traditional bank or a credit union. And you apply for a single loan in order to consolidate your debts. Now it’s generally easier doing it when you’ve got fewer debts. It’s tough to do it when you’ve got 10–15 creditors you owe money to. When you’ve got five, six, seven creditors, easier to consolidate.
You get a single loan, generally at a lower interest rate. And it becomes hopefully manageable that you reduce the credit card debt per se. Keep your student loan separately. I’ll talk a little bit about if you want to consolidate with the student loan. There are pros and cons to doing that, but that’s generally what your loan consolidation is doing. As I said, generally the banks, which I would advise people if they’re going to do it, look at the banks. There are some secondary lenders out there. You got to just be very careful and read the fine print, but there are multiple groups that will do these loan consolidations.
When is this a good solution as I say typically when you have done your budget and you basically have done the math saying, ”If I reduce this interest, I reduce my monthly payment. I can still manage my debt, manage my student loans, manage what other issues I have.” Be fully aware that not everybody’s going to qualify. They look at multiple criteria. They look at your income potential, the amount of debt you have and your ability to pay it back. So not everybody qualifies, but it doesn’t hurt asking. Credit history is going to play into this. Do you need a co-signer? Do you have a good credit history a bad credit history? Generally, what you see when you pull your credit bureau reports is not the same as what the banks calculate. So, there’s always going to be a little bit of a discrepancy, but they’re generally pretty… they’re a good guideline. So, you need to make sure that you have the ability and they’ll let you know, obviously, because if they say you’re not pre-approved, you don’t have the ability to consolidate your debts.
I mentioned the pros and cons of consolidating your traditional debt and including student loans in that. So, when bringing in student loans, you’ve got understand student (loans) are a government program. So, governments may tend to be a lot more lenient or provide a good ear to listen to and work with you. And if you need to extend that payment, you need spread your student loan payment out over a longer period of time. So, in those cases, you need to weigh up those options and may not be a great idea to consolidate your loans.
Because banks are not going to be as lenient per se.
Yeah. Banks are businesses. They’ve got shareholders to report to, they need to recover their money. So, once they’ve given you all this money, they want you to pay it back. And they will be open to a repayment arrangement, but at some point, where they feel you’ve got too much debt. They keep running credit bureaus on people, so they know where you’re at within your income ratios, your debt ratios, the government doesn’t do that. So, they will be a little bit more… If things start getting tighter, they feel that you can’t pay it back, there’s going to be a lot more pressure coming from these credit card and loan consolidations then there would be student loans. You got to weigh up those options. Do you keep the student loan separate, deal with your loan consolidation and pay that off at a lower monthly payment, and then speak to the government to see if you can extend the payment term of your loan? And there are other programs that we’re going to talk about a little later, where the government can help you with your student loan debt.
What about those who just can’t keep up with student loan payments? Is there a formal solution like a consumer proposal or a bankruptcy, a viable option for them?
Yeah. So, consumer proposal and bankruptcies are definitely viable options, which is what BDO offers, as Licensed Insolvency Trustees, is sitting down with individuals. It’s a free initial consultation. As I mentioned, we are federally licensed by the government to help people dealing with not just student loan debt, all debts. Government debt, tax debt, student loan debt, credit card debt. And we basically go through a financial snapshot of your life, of where you’re at: debt, assets, income. And it’s really a fact-finding mission. There’s no obligation for the individual. And based on that, we run through what your options are. And we will go through and say, “Based on your circumstance, one of the other options we spoke about the debt consolidation may be the best option for you.” We may guide you into the government repayment assistance program, which helps people’s student loan debt.
And what are those? Sorry to interrupt, but what are those? What are the basics of the assistance programs? I know in the recording, I just interrupted to ask a question, but I’m going to interrupt again because there has been a change to this since COVID started and I want to highlight that for our listeners. Deferrals or interest relief is available through the Repayment Assistance Plan for Canada Student Loans, but there are reports that the system is backed up because of the tens of thousands of applications. And you need to apply for RAP every 6 months. So now, I’m going to take you back for Ilan’s answer to the question.
So the government assistance program allows individuals to apply to the government in order to reduce their payments. You’ve got to qualify based on income levels, but it’s really a program where they giving as a say, assistance to individuals who are struggling. It’s really a program that’s for… it goes over a long period of time, but it runs in 6-month chunks. So, every 6 months you need to reapply because they want to see that you qualify, your income’s down below a threshold minimum. They have given that ability for where the government will help you with paying part of the debt. If you meet the criteria and your income is below a certain percentage of what they’re required to do in order to pay back that debt.
They’ve also offered for student grant extensions. So, they’ve pushed out another year. They’ve suspended certain reporting of income for these payments. So, there are a number of programs, which as I say, you have to contact your local government or the federal government to see if you qualify for these programs. So that would be a definite option when we sit down with individuals and see if they’ve explored those options.
So, once you’ve sat down and reviewed the government assistance programs that may or may not be available to someone, when would you then look at a consumer proposal or a bankruptcy?
We’ve gone through everything, we looked at the other options aren’t going to fit into your budget. You can’t make it work. So that’s when we would look at the consumer proposal and bankruptcy and, based on people’s circumstances, we would see what makes sense, once again, on their financial position. So, the bankruptcies and proposals, if you look at the two of them, they somewhat similar. The credit rating has a very similar timeframe impact to individuals. There’s no definitive answer. One would stay — the bankruptcy — on your record for 1–6 years, one would say seven years. The proposal’s on your record for — there’s different thoughts — six years to eight years at a maximum. So, they have a similar impact on the credit rating, but it’s definitely a shorter impact when you are struggling with debt then continue doing what you’re doing.
I always point out to the individuals I’m meeting with, the banks did us a favor few years ago and you look on your credit card statement they added a little block basically saying, “If you keep doing what you’re doing, it’s going to take you 99 years and 5 months to pay this off.” And I always say to them if they can guarantee I’m going to live for another 99 years, okay, I’ll keep paying them. But other than that, this is generally the quickest way to start rebuilding your credit — either a bankruptcy or proposal.
I’m so glad you touched upon that because as you know, I do a lot of the social for our firm. And I see that all the time. I see people commenting going, “Don’t do a bankruptcy. Don’t do a consumer proposal. It’ll ruin your credit.” So, I’m glad you touched upon that.
Yeah. And as I said earlier is the credit bureaus do a report and they’ve got their credit score and how the credits are reported. And everyone comes into my office and says, “I’ve got a perfect credit score. I’m sitting at 690. I pay a monthly blah, blah, blah it’s all good.” And I say, “That’s great. If you can walk into a bank today and they’ll give you a loan, then your credit score is good. But if you can’t get that loan, credit score means nothing.” So, the banks do different calculations when they look at these things and they look at multiple factors rather than just your credit score. So, you’ve got to be conscious of that. So, the proposal and bankruptcies, even with people where it says, great credit score. They can’t get the loans. They can’t do anything and they’re still, as I said before, drowning, right?
Two foot of water, 20 foot of water, you’re drowning no matter which way you look at it. So, the proposal offers what we call a settlement to your creditors. You say to your creditor, “I owe you X amount of dollars, but I cannot afford to pay it back. Therefore, I wish to pay you a lower amount based on my personal circumstances, my assets, my income.” And we’ve put it to the creditors. We help you draw this document it goes to the creditors, and they come back yes or no. And then if they say yes, you’re into the proposal. In certain circumstances where people have no assets, very low income, a proposal may not make sense. And that’s what we call the last resort...bankruptcy. So, you're basically putting your creditors on notice that you cannot…you’ll never be able to afford to pay them back and therefore you unfortunately have to file a bankruptcy. And it eliminates your debt, so you can be in the process anywhere from 9 months to 36 months or based on circumstances.
But it (bankruptcy) gives you the clean start. It gives you a fresh… I say to people, “You're hitting that reset button.” People look at as, “Ah, my life’s over. It’s the worst thing to do.” And I say, “No, you’re hitting a reset button. You’re getting a second chance.” And that’s the purpose of the act is to give the honest, unfortunate debtors, a second chance in rebuilding their lives.
I want to once again, thank Ilan Kibel, BDO License Insolvency Trustee for giving us so much great information and advice that we were able to use it to highlight the struggles of young Canadians who are dealing with the financial fallout from COVID. It really is a subject that’s weighing on the minds of students, grads and parents in Canada. For more financial wellness, podcasts and videos, along with debt management, resources, tools, and expert advice, visit our website, DebtSolutions.BDO.ca. And remember, we’re here to help you turn the page on debt.