What should I do about my student loan debt?

For those in their 20s and 30s who have been struggling to push through periods of reduced income and layoffs due to the pandemic, the resumption of student loan payments is not welcome news.

It’s no secret that student loan debt has affected an entire generation. If you left college or university with a substantial debt load, you know. At a time in life when your list of financial obligations can seem endless, student debt can be a major financial hurdle as you try to move forward in life.

Our own Student Debt Regret survey revealed that three-quarters of grads under 40 had regrets about the debt they accumulated while studying. Not surprising, since six-in-10 college and university grads were still paying off their student loans. In recent years, the burden of student loan debt (along with an uncertain job market, high living costs and soaring rent and home prices) has only intensified the financial struggles of the millennial generation.

In this episode of the BDO Financial Wellness Podcast, BDO Licensed Insolvency Trustee Ilan Kibel shares his insights on the current state of student loan debt in Canada. He also has credit management strategies for new grads, and debt advice for grads who are able to pay off student debt on their own, and for those who need professional debt help. To learn more about our conversation with Ilan, read the full transcript below. 

Hello, and welcome to the BDO Financial Wellness Podcast. I’m your host, Tera Beljo. And today we’re talking about student loan debt. For many young adults, student loans are the first experience they have with serious debt. Let’s face it, higher education is expensive. It’s not unusual for a grad to leave college or university with tens of thousands of dollars in outstanding student loans. The prospect of repaying a debt load of that size can be daunting and scary, especially in a time when you’re just starting out. Unfortunately, for a lot of Canadians, student loan debt payments are a fact of life for years, and sometimes, decades after graduation. Today, we’re going to shed some light on how student loan debt is affecting Canadians in their 20s, 30s, and even 40s.

Our 2020 BDO Affordability Index revealed some concerning statistics. And we’re also going to discuss money management strategies and debt solutions that will help alleviate the burden of student loans for younger and older grads. I’m happy to have our guest, Ilan Kibel, BDO Licensed Insolvency Trustee. Ilan works in BDO’s Toronto and Mississauga offices. Ilan and the BDO Debt Solutions professionals in the GTA, along with BDO teams and communities across Canada, help Canadians find the best solution to their debt problems. Welcome Ilan, let’s jump right in. Let’s start by talking a little bit about the general state of student loan debt right now in Canada.

Why student loan debt is an ongoing financial struggle

Ilan:

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 post 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.

Tera:

You just gave a dialogue of my life!

Ilan:

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 per cent 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.

Tera:

Well, as you mentioned, Ilan, Canadians in their 20s and 30s, and even 40s have been struggling financially for years. And now like all of us they’re faced with COVID-19 as you mentioned just a moment ago and the financial crisis. How has the pandemic affected these demographics and likely made it more difficult to keep up with their student loan debt?

Ilan:

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 four-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.

Avoid overspending on credit cards, especially if you have student loan debt

Tera:

Agreed. What credit advice would you give to younger Canadians, especially recent grads who are leaving school with 20 or even 25 thousands of student loan debt. What credit card strategies should new grads adopt to avoid debt problems down the road?

Ilan:

So I got two young kids that are in Grade 12 now planning their future. And we talk about this pretty frequently. And I say, “You’re going to go to these campuses when we are back in the campuses and you’re going to have all these credit card companies coming out and throwing, ’Hey, take a credit card, low interest rate!‘” I tell them that credit cards should be used as a replacement for cash and not debt. So if you can go put something on a credit card, you don’t have the cash in your pocket there and then. You know you can go home and within a couple of days actually pay off that balance. These credit cards come with very high interest rates. You’re talking an average of 19 per cent, some as high as 28 per cent. And then when you factor in the compounding interest on these credit cards, not a lot of people are familiar with what their compounding interest really means and what it does. Just look at it as interest upon interest. And it accumulates pretty quickly when you’re not paying your debt off at the end of every month.

Don’t use credit cards as a “replacement for income”

Tera:

Especially if your parents didn’t…you’re showing up on these campuses and your parents didn’t sit down with you while you were in your teens or as a child and talk to you about money. This is your first time. So you get out there, you have no idea what compound interest is.

Ilan:

Yeah. And the common question we get from a lot of people we meet at an initial free consultation is, “They never taught me this at school. No one told me what this meant. I got a credit card and I went out and I used it.” And unfortunately the whole thing is, nothing’s for free. So eventually you’ve got to pay that back. Credit cards, we should never ever be using them as a replacement for income. So you don’t use a credit card because you couldn’t afford the thing. And therefore you haven’t got the income, so you’re going to use the credit card. It’s eventually going to catch up with you. I always use the comment. I always say to people when you’ve got the credit card debt and you can’t afford to pay it. If you’re drowning in two foot of water, you can drown in 20 foot of water.

So no matter what the debt is, you’re always drowning. So you’ve got to be conscious of dealing with these things. As mentioned, if you put something on your credit card, know that you can go and pay it off within that month. We all need credit cards to help us build credit for the future. Especially as you’re younger, you eventually want to buy a motor vehicle. You want to buy a home. Those are things that we are hoping we can do. But when you use this credit card incorrectly or use debt incorrectly, it impacts your credit. Too many credit cards…everyone thinks, “The more credit cards I get the better my credit score will be.” Not true. They’re looking at different factors.

They’re looking at how much income do you make to support all that debt that you have access to? How much debt do you have and how close are you to the debt limits that they’ve given you? So all these things are going to factor into good credit and bad credit, and what you’re able to afford down the line. But you do need the credit cards to be able to buy these bigger item purchases. So it’s all about being smart with those credit cards, one or two credit cards. The one, the main one, the other one in an emergency are all good things to have.

How to use credit cards to create a positive credit history

Tera:

So in other words, don’t avoid credit cards altogether because you do need to have some sort of credit history.

Ilan:

Yeah. The credit bureaus look at people’s credit history. And if you’ve never had credit you’re not on the radar screen, they don’t know who you are. So they never going to give you a credit score. They want you to pay your credit back regularly to help you maintain a good credit score. If you delay your credit payments over a period of time, that obviously impacts your credit. So very key and important to be diligent with this if you’re going to use credit and use it wisely.

Tera:

Someone once said to me, your credit history or your credit report is like going for a job. You need a resume to get the job. So your credit history is your resume. And I always thought, “You know what? That’s a really good way of looking at it.”

Ilan:

Yeah, it’s really the only way companies can tell and reduce their risk. You’ve got to understand it’s all about reducing their risk. If they lend you money, can they make money? And can they reduce the risk that you’re not going to always default on those loans? So that credit score can give them that comfort that you’re able to deal with that.

5 ways to keep up with student loan payments

Tera:

So a lot of people are living on a reduced income because of COVID-19 right now. Now that the government student loan deferral program has ended. What advice do you have for people who are having difficulty keeping up with their student loan payments?

Ilan:

1. Track your spending with a budget

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.

2. Consider a debt consolidation loan

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 per cent 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’s 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.

Tera:

Because banks are not going to be as lenient per se.

Ilan:

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 arrangements, 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.

3. Speak to a Licensed Insolvency Trustee about your student loan debt

Tera:

Okay. So 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?

Ilan:

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.

4. Look into your options for student loan government assistance

Tera:

And what are those? Sorry to interrupt, but what are those? What are the basics of the assistance programs?

Ilan:

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 six month chunks. So every six 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 students 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.

5. Ask about a consumer proposal or bankruptcy

Tera:

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?

Ilan:

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 one for six 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 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 five months to pay this off.” And I always say to them if they can guarantee I’m going to live for a 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.

Tera:

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.

Ilan:

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…the last resort is the bankruptcy. So you 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 nine 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 hitting that reset button.” People look at is, “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.

What if I can’t afford a consumer proposal or bankruptcy?

Tera:

Now, what about people who say, “I can’t afford to file for bankruptcy, or I can’t afford a consumer proposal. I can’t afford to pay you Ilan.”

Ilan:

So if there is the true thing that they cannot afford to pay, there are bankruptcy assistance programs that are offered through the government we put people on. We generally work with people on a case by case basis based on the circumstances. But I think when we really sit down and go through the information with individuals and they start realizing that they were servicing five, six hundred dollars a month in debt, and they were actually doing it, but it was still paycheque to paycheque. When you go down through the budget with them and say, “We’ve eliminated that $600 a month payment, your payment may be two, $300.” They sit back and say, “Oh, okay, that’s a completely different perspective.” And there’s always options. I’ve never ever had anybody sit in my office and say, “Nothing we can do for you.” So there are always options.

And we’re here, that’s the purpose of what we licensed to do is review all these options and take the people in the direction that makes sense for them. So that’s really in a nutshell, the quick comparison on the bankruptcy/proposal, we did speak a lot about early in the podcast that student loans came up. That’s one of the debts that people who read out there, “Well, if you’ve got student loan debt, it never goes away. It won’t go away. And therefore I’m not going to tell the trustee or the Licensed Insolvency Trustee about my student loan debt.” People need to be aware that every debt you have gets included when we do a bankruptcy or a proposal.

It’s just whether it survives and lives on past the proposal bankruptcy is the big question. There are certain debts that will survive and student loans is one of them, depending on when you finished studying. Date of last completion of study is very, very important. I am currently working with a client right now who indicated that he had student loan debt. He finished studying in 2012, and he filed a proposal with me in 2019, you do the math, that’s seven years. Said to him, “Are you sure you better check this out?” He has a number to call student loans. “Find out the last date they have a record that you studied.”

He did that, but I don’t know if you really got the dates right so he filed his proposal and we get the proof of claim from student loans and it says, “We are filing a proof of claim. However, we retain the right for this debt to survive.”

Tera:

Oh no.

Ilan:

So I called the individual. I said, “This is what we have we’ve received from them.” He says, “No. No. I finished in 2012.” We went backwards and forward. We found out he finished in November of 2012. He filed in June of 2019. So he was five months off their timeframe. So now he’s going through, “What do I do?” Well, he can file a bankruptcy, which he doesn’t want to do. He can complete this proposal and file another proposal just to get rid of student loan debt. So there are options after the fact but this is very key, dates, times in what we do are very, very critically important.

That’s why you should be speaking to a Licensed Insolvency Trustee who know these things who can guide you and help you. There are other debt advisory places out there that may not know this that are not legally qualified to know these things. So very important, don’t be afraid to have those free initial consultations, open book and get everything… You rather know what could be coming down the road, then get hit by like this unfortunate individual that I’m trying to navigate. And I’ve somewhat got over that with him. He understands it was partly a misunderstanding, a miscommunication from him getting the information. But it’s a key thing and it could force him to have to do a second consumer proposal in five years’ time.

Why it’s important to spend your student loan wisely

Tera:

Oh goodness. So earlier in the podcast and this is not something we normally talk about because while you’re in school, you’re really not thinking about how you’re going to pay for this schooling that you’re doing. You’re just like you’re in school and that’s all you’re concentrating on. And a lot of students, or parents of students don’t think to sit down and have the conversation about, “What do we do with this money?” So is there any advice that you would give to current students who have taken out student loans on how they can make the impact of a student loan, less on them once they’re done their schooling.

Ilan:

So I think we started in the beginning saying that there are from our surveys that people are saying they wish they had been a little bit more frugal. And not spend as much, not just use the money for… Student loans is for the student loan and living. But live within your means, live within what makes sense, so that you’re not regretting later on in life. There was a quote I heard, I can’t remember or a statement I heard saying, “Live like nobody else so when you’re older, you can live like nobody else.” So live today where things are a little bit tougher… You still young, you can afford to live a little bit of more of a shoestring budget. Weigh up your want vs your need and be a little bit more frugal.

So when you’re older and hopefully you’re making decent money, you’re not paying off student loan debt, you’re enjoying your fruits of your labor and your education. So that’s definitely being a little bit more thrifty with your spending younger and then hopefully when you’re older there’s not this… We don’t have the repeat of the 30, 40 year–old still paying off student loan debt and saying they can’t afford a car, they can’t afford a house. And maybe not even sometimes put food on the table. So it’s an important thing to be a little bit more frugal as you’re younger when you can be.

Tera:

Well, thank you so much for your time, Ilan. It was a pleasure speaking with you today.

Ilan:

Perfect. Thank you.

Tera:

I want to once again, thank our guest today, Ilan Kibel, BDO License Insolvency Trustee for talking to us about student loan debt. 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.

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