Student Loan Debt Consolidation

Your Alternatives: Debt Consolidation, Bankruptcy, or Something Else?

What are the advantages and disadvantages of student loan debt consolidation? Do I qualify for a debt consolidation loan for student debt consolidation? Is bankruptcy a better option?

Here is the hard truth: although they can be managed, student loans can be a difficult type of debt to resolve, for several reasons. Read on to learn your options.

Why Student Loan Debt Is Particularly Hard to Deal With

First, most student loan recipients are young, and the student loan debt they have incurred is often their first significant financial debt. Students may not have the life experience to understand how credit operates. Therefore, a student may not have considered a plan for repayment. When it comes to repaying, they are unprepared.

Second, the student’s ability to repay the loan is often contingent upon getting a job upon graduation. What if this doesn’t happen right away?

Third, student loan debt is distinct from many other types of debt in that the option of clearing it through an insolvency solution such as bankruptcy or consumer proposal is not usually available until seven years after the student ceases full-time studies. Since lenders know that you can’t eliminate the loan by filing for bankruptcy, it may be harder to negotiate favourable payment arrangements with them.

See this page from the Government of Canada for more information about student loans and bankruptcy.

Since you may not be able to get rid of your student loan by going bankrupt, student loan debt consolidation may be the correct option.

Advantages and Disadvantages of Student Loan Debt Consolidation

Here are some advantages of getting a debt consolidation loan to deal with your student loans:

  • If you consolidate your government-guaranteed student loans with a bank or other lender, you will then owe the money to a bank, rather than the government. This can be a big advantage, since if you don’t pay your student loan the federal government can seize your tax refunds; the bank cannot seize tax refunds for non-payment.
  • It may be possible to negotiate more favourable interest rates with another lender.
  • Your credit rating could improve. If you have a negative credit report because of past-due student loan payments, a debt consolidation loan may allow you to get back on track and repair your bad credit.
  • You may be able to negotiate to repay your debts over an extended period, potentially decreasing your overall monthly payments.

There are, however, a few disadvantages to getting a debt consolidation loan to deal with your student loans:

  • If you keep the loan with the Government of Canada, you may qualify for a Repayment Assistance Plan, which allows you a longer period to pay. This may not be available if you owe the money to a bank.
  • Interest on student loans may be tax deductible. Interest on a debt consolidation loan is not tax deductible, so by consolidating you may eliminate the tax breaks associated with a government-guaranteed student loan.
  • If you have poor credit or a short job history, the interest charged on the loan by the bank may be higher than what you are currently paying.

There are significant advantages but also some important disadvantages to consolidating your student loans. It can seem quite complicated!

Next Steps: Gather More Information

To decide if a debt consolidation loan is the correct option for you, talk to your bank to determine what interest rate they will charge, and whether you qualify for a consolidation loan. Then, compare their plan to what you are currently paying.

If you are nearing seven years out of school and are having trouble making monthly debt payments, you may also wish to consult with a Licensed Insolvency Trustee to learn whether consumer proposal or bankruptcy would fit your unique situation. A Trustee can also advise on other debt solutions. Your first, confidential appointment is free.

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