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College and university tuition can be very expensive, forcing students to take out loans to help cover the cost of their post-secondary studies. 

According to Statistics Canada, the average student loan debt is $28,000 for a bachelor’s degree and $15,300 for college graduates. And in many cases, the number is much higher, putting grads in a pile of student loan debt for years following graduation.

Unfortunately for many, student debt can be too much to handle. In dire situations, debt relief solutions may be required. If you’re finding yourself unable to pay back your student loan, one way to help reduce or eliminate it is through a consumer proposal. 

Read on to find out what’s involved in a consumer proposal, including the costs, eligibility requirements, and its effect on your credit rating. 

Do Consumer Proposals Cover Student Loans?

Student loan debt may be alleviated under consumer proposals, depending on your end-of-study date. The amount of time that you’ve been out of school will determine whether or not your student loan debt qualifies for debt forgiveness under a consumer proposal. 

What Is A Consumer Proposal?

A consumer proposal is a legal process in which a Licensed Insolvency Trustee (LIT) works with you to resolve your debts. Your LIT will communicate and negotiate with your creditors to come up with an agreement whereby a portion of your outstanding debt is forgiven by your creditors, while the remaining debt is repaid through more affordable installment payments. 

If your creditors agree to this arrangement, they’ll cease all debt collection actions, including any lawsuits or wage garnishment.

Can A Consumer Proposal Affect Your Credit? 

While this may help alleviate your debt, it can severely negatively affect your credit scores.  Consumer proposals result in a credit rating of R7, which will be noted in your credit report. This will remain on your report for 3 years after you’ve repaid all your debts as per the proposal, or 6 years from the consumer proposal filing date, whichever comes first.

During this time, your ability to qualify for financing and credit products will be significantly reduced. But once the negative mark on your report is removed, you can work towards rebuilding your credit.

Do Consumer Proposals Forgive New Or Old Student Loans? 

As mentioned, whether or not your student loan qualifies for debt relief under a consumer proposal depends on how old your student debt is: 

Are Old Student Loans Forgiven Under A Consumer Proposal?

Your student debt must be more than 5-7 years old in order for it to be considered eligible in a consumer proposal. 

If you’ve been out of school for at least 5-7 years, your student debt may qualify for debt forgiveness as part of your consumer proposal. But if you’ve been out of school for less than 7 years, your student loan debt may not be forgiven under this arrangement.  

Are New Student Loans Forgiven Under A Consumer Proposal?

If you’ve been out of school for less than 5-7 years, your student debt may not qualify under a and you’ll still be responsible for its payment. Even if your consumer proposal is accepted, your student loans will remain after the proposal has ended. 

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What Can You Do If Your Student Loan Doesn’t Qualify Under A Consumer Proposal? 

Even if your student debt does not qualify for forgiveness under a consumer proposal, a consumer proposal can still help alleviate your debt issues. Here are a few options to consider:

Negotiate With Your Lender

There is an exception to the 5-7-year rule when it comes to using a consumer proposal to deal with your student debt. If your student loan lender agrees to discharge your student debt — even if it’s been less than 5-7 years — a consumer proposal may work. Your lender would have to detail the amount you need to pay back in your proposal agreement and promise not to pursue you for payments after your consumer proposal is paid off.

Some lenders may agree to this arrangement to avoid dealing with bankruptcy, which is costly to both borrowers and lenders. Your lender may be even more incentivized if you’re close to the 5-7-year mark. 

Eliminate Other Debt

If you have a lot of other unresolved debt besides your student loan, you may be able to use a consumer proposal to have other debt forgiven. For instance, other unsecured debts like credit cards, personal loans, or payday loans can also put pressure on your finances. 

If you have a lot of other debt piling up, consider a consumer proposal to deal with this debt besides your student loan. This may help open up your finances and make your student loan payments more affordable. 

Speak With Your LIT

There may be other debt relief solutions available to you to help you deal with your student debt. Speak with your LIT, who can assess your financial situation and provide other debt relief solutions that may work for you.

Other Ways To Get Rid Of Your Student Debt

Aside from a consumer proposal, there may be other ways to eliminate your student loan debt, including the following:

Bankruptcy

The last resort in dealing with debt is bankruptcy. This process will also eliminate your student debt if you’ve been out of school for at least 5-7 years. 

Bankruptcy is a legal process that involves discharging your debt if you’re unable to repay it. This process is typically the most cost-effective and quickest way to eliminate student loan debt and may be more suitable if you can’t afford the costs associated with filing a consumer proposal. It may also be a better option if you need financial relief from all of your other debts, including your student loan.

Like a consumer proposal, bankruptcy involves working with a LIT who will work on your behalf and guide you through the bankruptcy process.  

Repayment Assistance 

The federal government in Canada offers repayment assistance that can help you repay your student loan through the following programs:

Repayment Assistance Plan (RAP) 

You may be eligible for reduced payments or no payments at all under RAP, depending on your income. You can apply for RAP when you start repaying your student loans and must reapply every 6 months to remain qualified for the plan. 

You will also have to pay the interest owed on your outstanding debt that is not covered by your reduced payment. You’ll also need to start repaying the principal and interest after 5 years of RAP or 10 years after you complete school.

Repayment Assistance Plan for Borrowers with Disabilities (RAP-D)

If you qualify for RAP-D, the Canadian government will repay the principal and interest on your behalf that your reduced monthly payments don’t cover. The outstanding balance will continue to be paid back until it is fully repaid, as long as you remain eligible for the plan. 

Consumer Proposals And Student Loans FAQs

Can I get a student loan while in a consumer proposal?

A consumer proposal has a negative effect on your credit rating, which can make it very difficult to get secure loans and credit products until your credit improves. That said, getting approved for a student loan during a consumer proposal is not impossible, though you may find that your options are very limited. Also, the interest added on will be extremely high because you’ll be seen as a risk to lenders.

Can I apply for OSAP if I applied for a consumer proposal?

Your ability to receive funding through the Ontario Student Assistance Program (OSAP) depends on your specific situation. You’re free to apply for OSAP if you’ve filed a consumer proposal, but you’ll need to provide additional information, including a letter from your LIT indicating that the federal or provincial governments are or creditors in your consumer proposal, and proof that none of your OSAP funds will be seized to pay back your creditors. If you’ve completed your consumer proposal, you’ll need to provide proof of completion and that the funds you receive won’t be used as income to repay any creditors. 

Can I negotiate my student loan terms as part of my consumer proposal?

You can negotiate a payment plan with your lender as part of your consumer proposal to try to get more affordable repayment terms, even if your student debt is not automatically forgiven. Your lender may also be open to reducing a portion of your student debt if you detail the terms for loan repayment in your consumer proposal.

Final Thoughts

A consumer proposal may be a suitable option if you have mounting student debt that you can’t seem to get a handle on. However, a consumer proposal may only work in certain cases, and there are some costs associated with filing this legal process. Speak with a trustee before deciding if a consumer proposal is a right option to help you deal with your student debt.

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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