Student loans are a serious undertaking, especially for those fresh out of college. Student loans like OSAP total to over $20,000 per student on average, making repayment long and difficult. Over 77% of Canadian graduates over 40 say they regret taking out their student loans.
When someone finds themselves unable to repay their loans, one common avenue they take is filing a consumer proposal. A consumer proposal is a formal agreement between yourself and your creditors to repay the debt under different terms. These new terms often include paying off a smaller portion of your debt than what you originally agreed to.
Many ask us whether it’s possible to include student loans in a consumer proposal and how it works. Today, we’re here to help you understand the consumer loan process for student loans
Can You Include Student Loans in a Consumer Proposal?
Yes, you can include government student loans in a consumer proposal. However, you can only be discharged from the debts if you meet the 7-year rule.
What is the 7-Year Rule?
The 7-year rule is outlined in the Bankruptcy & Insolvency Act. You need to be out of school for at least 7 years before you can be fully discharged from your student loan debt. The 7-year period only applies to government-funded student loans and starts when you are no longer a student. Returning to school may reset the 7-year waiting period.
What is the 5-Year Rule?
The 5-year rule is the only exception to the 7-year rule. It shortens the waiting period before you can be discharged by court order. You must prove that not being discharged from your student loans will cause serious financial hardship.
What Happens If You Include Student Loans in a Consumer Proposal
Here’s what the process will look like when you include student loans in a consumer proposal:
- Upon filing the proposal, all of your creditors, including the National Student Loans Service Centre (NSLSC), will receive a copy of the proposal.
- Along with the rest of your creditors, the NSLSC will have the option to either accept or reject your proposal. At least 50% of your creditors will need to accept the proposal in order for it to become valid. Even if NSLSC rejects the proposal, they will still need to honour it if at least 50% of your other creditors accept it.
- Once the proposal is accepted, your creditors and NSLSC will have to stop all collection actions against you.
- You will be able to repay all of your creditors (including NSLSC) under the new terms outlined in the proposal. You must not miss a payment while under a consumer proposal. Missing any payments will automatically make the proposal invalid.
- Once the consumer proposal is completed, your LIT will let you know that you have been formally discharged. This means you’re no longer legally responsible for repaying the student loan debt (unless you’re under the 7-year rule).
What If You’re Under the 7-Year Rule?
What if you’re under the 7-year limit by the end of your consumer proposal? You will not be discharged from your student loan debt and will be expected to pay the remaining balance.
The only benefit to having your student loans included before the 7-year period is that you will get temporary relief from collections. However, collections will continue after the proposal is completed.
Overall, waiting through the 7-year period is a better choice if you’re trying to completely relieve yourself of your student loan debt.
When to Include Student Loans in Your Consumer Proposal
Need advice on when is the best time to include student loans in a consumer proposal? Here are different scenarios when including student loans in your consumer proposal makes sense:
- It’s been 7 years since you left school.
- You have private student loans (not provided through government funding options like OSAP).
- You are incapable of repaying your student loans under the original loan terms.
