Student loans are a serious undertaking, especially for those fresh out of college. Student loans like OSAP typically total to over $20,000 per student, making repayment long and difficult. With this, it’s no surprise that 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. To briefly summarize, 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.
One important question to consider is 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 as long as you meet the 7-year rule (or alternatively the 5-year rule with undue hardship).
What is the 7-Year Rule?
The 7-year rule is outlined in the Bankruptcy & Insolvency Act and requires you 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 and shortens the waiting period before you can be discharged by court order. You can only get this court order if you and your lawyer can 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. For consumer proposals, at least 50% of your creditors will need to accept the proposal in order for it to become valid. This means that even if NSLSC rejects the proposal, they will still need to honour the proposal’s terms 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, as 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 of all debts. This means you’re no longer legally responsible for repaying the debts (unless you’re under the 7-year rule).
What If You’re Under the 7-Year Rule?
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 during the proposal. 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.
Can You Get OSAP If You Have a Consumer Proposal?
Having a consumer proposal on your record does not automatically disqualify you from receiving OSAP. Unlike bankruptcy, a consumer proposal does not trigger an automatic ban from government student aid. However, there are important factors to understand:
- OSAP eligibility is need-based, not credit-score-based, so the consumer proposal itself is less of a barrier than it might be for a traditional loan.
- However, if you are currently in an active consumer proposal and wish to return to school, you should speak with your Licensed Insolvency Trustee. Returning to school can affect your proposal terms and may reset the 7-year student loan discharge clock.
- Private lenders who supplement student funding may conduct credit checks, and an active consumer proposal could impact your ability to access those funds.
Bottom line: OSAP may still be available to you during or after a consumer proposal, but returning to school may affect your proposal terms — specifically whether or not you can be discharged from the student loans included in your consumer proposal. Always consult with a Licensed Insolvency Trustee before getting OSAP while in a consumer proposal.
Can You Get a Student Loan While in a Consumer Proposal?
Getting a new student loan while you are actively in a consumer proposal is challenging but not impossible. Here’s what you need to know:
Government Student Loans (OSAP)
As noted above, OSAP is assessed primarily on financial need rather than your credit score. This means an active consumer proposal does not automatically disqualify you from OSAP funding. That said, the act of returning to school while in a consumer proposal can have unintended consequences.
- It may reset the 7-year clock, meaning the period before your existing student loans can be discharged starts over.
- Your Licensed Insolvency Trustee must be informed, and your proposal administrator may need to adjust the terms.
Private Student Loans
Private lenders will perform a credit check. Because a consumer proposal negatively impacts your credit score — usually dropping it significantly during the proposal period — qualifying for a private student loan while actively in a proposal is difficult. You may face:
- Higher interest rates
- Smaller loan amounts
- Outright rejection from many traditional lenders
What Are Your Options?
If you need funding for education while in a consumer proposal, consider:
- Applying for OSAP as your primary funding source
- Exploring bursaries and grants (non-repayable, no credit check)
- Speaking with your school’s financial aid office about emergency funds
- Waiting until your proposal is completed and your credit begins to recover
Can You Get Any Loan While in a Consumer Proposal?
Many Canadians in a consumer proposal wonder whether they can borrow money at all during the proposal period — for any reason, not just education.
The short answer: yes, you can legally take on new credit while in a consumer proposal, but it is difficult and often costly.
Here’s why:
- A consumer proposal is listed on your credit report and significantly lowers your credit score (often to the 500–600 range).
- Most traditional lenders — banks, credit unions — will decline new loan applications from applicants actively in a consumer proposal.
- Non-traditional lenders (high-interest personal loan providers) may approve you, but the rates are often extremely high, which can worsen your financial situation.
- There is no legal prohibition against taking on new debt during a proposal, but your LIT may advise against it, and taking on significant new debt could complicate your proposal.
Types of Credit That May Be Available During a Proposal:
- Secured credit cards (requires a deposit, helps rebuild credit)
- Credit-builder loans from certain credit unions
- OSAP and need-based student aid
- Some auto loans through subprime lenders (though at high rates)
Our recommendation: Use the consumer proposal period to stabilize your finances rather than take on new debt. If you genuinely need a loan for an essential purpose such as education or transportation, speak with your LIT first.
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 has been at least 7 years since you last left school: This is the best time to include student loans in a consumer proposal. After the 7-year mark, you can be fully discharged from your student loan obligations upon completion.
- You have private student loans (not government-funded through OSAP or similar programs): Private loans are not subject to the 7-year rule and can be included and discharged under normal consumer proposal terms.
- You are within the 7-year window but need collection relief: While you be fully discharged from the student loan debt, you will get temporary breathing room from NSLSC collection activity.
- You qualify under the 5-year hardship rule: If you and your lawyer can demonstrate undue financial hardship, you may be able to seek early court discharge.
- Your student loan debt is a smaller portion of your overall debt: If you have other debts that are a significant financial burden (credit cards, personal loans, CRA debt) in addition to student loans, a consumer proposal can address all of them at once.
Frequently Asked Questions
Does a consumer proposal clear student loan debt?
A consumer proposal can clear student loan debt, but only if you have been out of school for at least 7 years when the proposal is completed. If you meet this threshold, government student loans can be fully discharged through a consumer proposal.
Will OSAP find out about my consumer proposal?
Your consumer proposal is public record, so yes, OSAP can find out about your consumer proposal if they look for it. That said, OSAP assesses eligibility based on financial need, not credit history. OSAP does not typically deny applicants solely based on a consumer proposal.
Can I go back to school while in a consumer proposal?
Yes, you can go back to school while in a consumer proposal, but you should inform your Licensed Insolvency Trustee. Returning to school may reset the 7-year student loan discharge clock, which has significant long-term consequences on your debt relief.
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