There's another debt-deferral cliff looming this fall

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Canada is heading towards another debt-deferral precipice this fall, when thousands of borrowers who had student-loan obligations delayed during the summer of COVID-19 must resume making payments — even if their job prospects have taken a hit.

The coming mortgage-deferral cliff has received lots of attention since Canada Mortgage and Housing Corp. flagged the threat in the spring. But there also are approximately one million Canada Student Loans borrowers who had their repayments and interest on loans worth more than $11 billion automatically paused by the federal government from March 30 to Sept. 30, when forecasts suggest the economy will still be struggling.

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The resumption of those student-loan payments in October could put pressure on individual borrowers, given younger workers have been hit especially hard by the recession. That would weaken Canada’s overall economic recovery from the pandemic. Recent graduates struggling to make ends meet could be forced to spend less on needs and wants and more on paying down debt, stunting the rebound and creating the possibility of longer-term negative financial effects for borrowers.

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“One hundred per cent, students are going to be in a difficult financial position,” Bryn de Chastelain, chair of the Canadian Alliance of Student Associations (CASA), said in an interview. “And that’s because a lot of the support that the federal government has put in place for students was meant to help us get through the summer.”

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The government’s rescue effort has included doubling grants and creating the Canada Emergency Student Benefit (CESB), which provides direct payments of $1,250 or $2,000 every four weeks to eligible students from May to August.

Yet pollingcommissioned by CASA found in May that most postsecondary students who qualified for either the CESB or the $2,000-a-month Canada Emergency Response Benefit “don’t think it will be enough to get them through the Fall 2020 semester, let alone beyond.”

De Chastelain also noted that jobs could be scarce in the fall, a problem for students who require an income to support their studies. The moratorium on student-loan payments eased some of the financial stress students were feeling, but hasn’t eliminated it.

One hundred per cent, students are going to be in a difficult financial position

Bryn de Chastelain

“There is still significant concern about whether students will be in a position to start repaying those loans,” de Chastelain said.

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The federal government’s holiday on student-loan payments is estimated to cost $190 million in the current fiscal year, according to the fiscal snapshot of the government published in July. It excludes student debt owed to commercial banks or provincial programs as well, with both of those sources of financing allowing their own payment deferrals.

And just like homeowners who have had mortgage payments postponed, if the financial situations of student-loan borrowers have worsened, resuming those repayments could prove a challenge. This threat was dubbed a debt-deferral “cliff” by Evan Siddall, CMHC’s president and CEO, in May.

CASA wants an extension of the student-loan payment moratorium. Likewise, the Undergraduates of Canadian Research-Intensive Universities (UCRU) coalition has said there should be a two-year grace period on all federal student loans for new graduates, who are entering the job market in a recession.

The longer grace period would “assist students searching for good jobs while taking on less debt, supporting Canadians and stimulating the Canadian economy in response to COVID-19,” the group said in a submission for the government’s 2021 budget.

There were already signs that student-loan debt was weighing more heavily on borrowers before the crisis.

A Statistics Canada survey of graduates found the percentage of those with debt after getting a bachelor’s degree hovered at around 50 per cent from 2000 to 2015, but the percentage owing $25,000 or more at graduation rose from 33 per cent to 45 per cent. The average debt for a bachelor’s graduate as of 2015 was $28,000, up from $20,500 in 2000.

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Furthermore, a2019 study by insolvency firm Hoyes, Michalos & Associates Inc. called student debt in Canada a “crisis,” as it was increasingly a factor in insolvency filings.

Student debt contributed to a record 17.6 per cent of insolvencies in Ontario in 2018, the study found. If the situation was similar in other provinces, then approximately 22,000 ex-students could have filed for insolvency that year in connection with school-related debts, Hoyes, Michalos & Associates said.

The study also found the average insolvent student debtor owed $46,373 in unsecured loans, including $14,729 in student debt, with rising tuition costs seen as the driving force behind the red ink. Moreover, while “poor” financial management was viewed as the leading cause of debt issues, nearly a third of student debtors said that employment and income problems had added to those concerns.

“Graduates leaving university often end up working in unpaid internships, part-time positions, and minimum wage jobs,” the Hoyes study said. “They are increasingly unable to find a stable job with enough income to support both student loan repayment and living expenses.”

(Graduates) are increasingly unable to find a stable job with enough income to support both student loan repayment and living expenses

Hoyes, Michalos & Associates study

That employment picture has been made much worse by COVID-19, and particularly so for younger people. Statistics Canada reported employment among those aged 15 to 24 was still 17.4 per cent less in July than it was in February.

“The average student takes about 10 years to repay a loan, and that’s hundreds of dollars a month that they’re paying as they’re going through that process,” said Nicole Brayiannis, the national deputy chairperson of the Canadian Federation of Students. “That limits the ability for young people and graduated students to be able to participate in the economy.”

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>University students already get a six-month, interest-free, non-repayment period for federal loans after they finish full-time studies, meaning recent graduates may not necessarily have received any extra help from the COVID-19-related debt deferral. Still, if someone’s non-repayment period did end during the COVID-19 moratorium, their payments and interest would be automatically suspended until Sept. 30.

“The Government continues to monitor the situation and examine ways to continue to support students through this extraordinary time,” a spokesperson for Employment and Social Development Canada said in an email. “With respect to borrowers who will be resuming the repayment of their CSL at the end of the moratorium, the Government of Canada has measures in place to help them repay their loans.”

There is a Repayment Assistance Plan (RAP) for Canada Student Loans Program borrowers. For those who are eligible, they could have monthly payments reduced.

Ottawa also tweaked the RAP pre-pandemic, increasing its eligibility cutoff so no borrower would have to repay their loan until they are earning at least $25,000 a year, with that threshold adjustable depending on family size.

If student-loan defaults were to shoot up for the federal government, they would do so from what are likely historically low levels. The Canada Student Loans Program’s three-year default rate dropped from 28 per cent in 2003-04 to nine per cent for borrowers beginning repayment in 2016-17, according to answers that government officials provided to the Senate of Canada’s finance committee.

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A recent report by the Auditor General of Canada also found the amount of federal student debt being written off declined to $160 million in the 2018–19 fiscal year, although interest waived and principal forgiven under the Repayment Assistance Plan rose to a combined $344 million. The same report said the government wasn’t doing enough to ensure student-loan borrowers understood their obligations.

However, emails were recently sent out telling recipients that the National Student Loans Service Centre, which is run by a private-sector service provider and handles Canada Student Loans collection, is “here to help you prepare and ensure you are set up for success when repayment resumes” in October.

“If you have unfulfilled payments from before the COVID-19 relief measures, this may be a good time to address these payments and bring your loan(s) back into good standing before repayment resumes,” the National Student Loans Service Centre email adds. “We will be in touch in September with more specific information regarding your next steps.”

Financial Post

? Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne