Student Loans and Bankruptcy in Canada – The Saga Continues
We still don’t know when the new rules will come into force, and the Senate continues to hold hearings on the new rules. As reader’s of this blog are aware, Ted Michalos and I, Douglas Hoyes, appeared before the Committee on February 7, 2008, and I posted my comments on our Senate Testimony on Student Loans and Bankruptcy shortly thereafter. You can view our complete testimony as it related to student loans on You Tube, and you can see it here as well:
Student Loans Testimony Part 1:
Student Loans Testimony Part 2:
Student Loans Testimony Part 3
Student Loans Testimony Part 4
The written transcripts of our testimony are also available, in English and French, on the Senate Banking Committee Web Site.
During my testimony I made the case that former students with student loans that go bankrupt have lower incomes than other Canadians, and that’s one of the main reasons they need to go bankrupt in Canada. Following our testimony, on March 13, 2008, Rosaline Frith, Director General, Canada Student Loans Program, appeared before the Committee to make the case that the plight of students was not nearly as dire as I, and other witnesses, had made it out to be. She received quite a grilling by the Senators, and many questions were left unanswered.
As a result of these unanswered questions she was called back to testify again on April 3, 2008. I am only aware of one newspaper that covered the hearings; you can read their story in New Brunswick’s The Daily Gleaner.
I have read the unofficial transcripts of the hearing. Once they are finalized they will be posted on-line on the Senate Web Site, which usually takes about two weeks. While we await the official transcripts, here are some quotes from the unofficial transcripts:
Ms. Frith: “We have also compiled information on the percentage of students in default and collection. Student loan default rates are calculated on borrowers during the first three years following consolidation of their student loan debt. One-hundred and fifty-three thousand Canada Student Loan borrowers consolidated their Canada Student Loans in the 2003-04 loan year for an approximate worth of $1.63 billion. That year, 43,600 borrowers defaulted and were transferred to the revenue agency for collections, for a total principal value of $330,928,063. The default rate for this cohort was 28 per cent. Those were the people in 2003-04.” (emphasis added)
Translation: The government admits that 28% of the borrowers from the 2003-2004 school year are in default on their student loans! That’s a huge default rate for any lender.
Then the next surprise: Currently, an outside collection agency is used to collect student loans. The government has reviewed this approach, and also testifying at the hearing, Tony Manconi, Director General, Non-Tax Collections, Canada Revenue Agency, had this to say:
“As a result of the review, the government made a decision that the CRA will be discontinuing its use of private collection agencies for the collection of default of Canada Student Loans and it will assume full responsibility of this function.”
Translation: Even though there were no problems with the program, we are going to completely change the way we collect from former students.
But wait, it gets better. In her opening statement, Ms. Frith said that the government is introducing new measures to help students, and:
“The new measures will make payments affordable, and no student borrower would be forced into bankruptcy as a result of their student loan.”
There you have it: the government has now committed that in the future no student borrower will be forced into bankrupt because of their student loans! Hooray! I can stop writing this blog, because all problems have now been solved! But that begs the question, asked quite eloquently by Senator Ringuette:
“You say in your statement: The new measure will make payment affordable and no student borrower will be forced into bankruptcy as a result of their student loans. How will you achieve that?” Good question. Here is Ms. Frith’s response:
Ms. Frith: Any student who graduates within the first six months after graduation and is unable to acquire employment or has employment at a very low income, depending on the size of their family and where they are living, they would be able to apply for repayment assistance, as is the case today. However, in the future, as a result of the budget, we would do a calculation when they would apply for repayment assistance. They would be required only to make a payment which is affordable.
Therefore, if they are below a certain income level, depending, again, on the size of the family, they might not have to make any payment at all. The government would assume the cost of the interest and the principal for a period of time. Then, every six months, we would look again at their salary levels and discussing it with them. We would conclude what would be an affordable payment.
Under the new plan, they will not have to make any payment at all, if they cannot afford to make any payment according to the criteria. The government will continue to assume the full burden of their loan, up to a limited period. This is not something that would go on forever. There would come a point where the loan would have been completely paid down and they would no longer have any obligation.
In respect to their student loan, there should never be any stress on the person that would be forcing them into bankruptcy because of someone harassing them for collection or anything else with respect to their student loan.
Senator Ringuette: As you have said and as has been discussed before at this committee, collection harassment is twofold: One was from your portion of the student loan administration and the other one was from Revenue Canada. You are only able to talk about your portion of the student loan collection.
Ms. Frith: This is true. However, my assumption would be that a student informed about what is available to him or her would not go to collections. He or she would apply for repayment assistance and would stay in repayment assistance for as long as is necessary. A student would never default. He or she would never be forced into a default situation.
I cannot imagine who would actually default. You would be defaulting to make a point. You would be doing it because you decided you did not want to apply for repayment assistance. The program that is being put in place is such that no one would be ever put in a situation where they should be defaulting on their loan.
There, my dear readers, is the perspective of the government officials running the student loans program. Despite the fact that they have maintained everything is fine and no changes are required to the current rules, they admit that 28 percent of students from 2003 are in default, and the program is so bad they are now going to move collection activity in house, and they are bringing in new measures to help students! The new measures, announced in the 2008 federal budget, amount to $74 million over four years to make the Canada Student Loans Program “more responsive to the economic circumstances of borrowers by providing greater assistance to those experiencing difficulty in repaying their loans. The new measures will make payments affordable, and no student borrower would be forced into bankruptcy as a result of their student loan. More details on the improved measures will become available over the coming months.”
Translation: $331 million of student loans are in default just for the 2003-2004 year, but $18.5 million per year in new funding, and some new procedures, will fix all of those problems, and the result will be that “a student would never default“. (Of course we have no idea what this really means; fortunately “more details…will become available over the coming months.”
This all sounds great, but I think we are missing two key points here.
First, Canada student loans represent about 60% of outstanding student loan debt. The other 40% is funded by provincial student loan programs. If the federal government is correct and these “new measures” do solve all problems, they are only solving 60% of the problems; unless the provinces also reform their procedures, which to date they have not done, we still have a huge problem.
Second, the officials at the Canada Student Loans Program seem to believe that everyone graduates, and then just decides not to repay their loans. In fact, when asked to comment on the profile of the average student loan debtor, Ms. Frith said that some of the defaulters are “what I would call early defaulters, who are young and male, and who have incurred probably all kinds of other debt, such as for cars. They sometimes choose not to make payments.” They have probably incurred all kinds of other debt, such as for cars. Why the word “probably”? I assume it’s because that’s an opinion, not based on hard facts. It seems unfair to characterize debtors who aren’t paying as young males who spent all of their money on cars.
I disagree. My firm has handled well over 10,000 personal bankruptcies and consumer proposals over the last ten years, and if I may draw on my experience from the few thousand people I have personally met with, fancy cars is not the main reason people don’t repay their student loans.
The main reason is that we get student loans when we are young. We go to school hoping to get a job in high tech, just before the high tech bubble bursts. Or, even worse, we don’t actually graduate. I have personally met with dozens of people who went to a private vocational school and before they could graduate the school went out of business. It happens fairly frequently. Unfortunately for those students, they must still repay their student loan, even though they didn’t get the benefit of their education.
In fact, in our written submission to the Committee, we demonstrated that “Jane Student”, the average student loan debtor who goes bankrupt, is actually more likely to be female and earning a low income, certainly not a male with a car payment.
I fully agree that if you graduated as a doctor and you are earning $200,000 per year, you should pay back your student loans. I’m a taxpayer, and I don’t want my taxes to increase because student loans are not being repaid. However, if you couldn’t graduate, or if you have been unable to secure employment where you can earn enough to repay your student loan, you should be given a break.
That’s why I went to Ottawa to argue for more compassionate treatment of former students, and that’s why I maintain this blog.
That’s my rant for today. In the future I’ll try to stick just to the facts of the situation.
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