Student Debt: A Sure Path to Insolvency?

Few financial issues have received as much attention as the widely acknowledged student debt crisis. The Canadian Federation of Students surmises that students in Ontario and the Maritimes have retained the highest average student debt, at $28,000 per student while heavy student loans are a problem all across Canada. Overall, the federal student debt amount has surpassed $15 billion, and this amount is increasing each and every day.

Of course, with the average debt at nearly $30,000 per student, graduates must work diligently to decrease this liability over the course of their working lives. Too often these individuals are unable to do so, however, and become insolvent as a result.

Crippling Student Loan: What We Discovered

To find out more about the average profile of debtors in Canada, and, more specifically, what it is that may lead them to insolvency, my firm, Hoyes, Michalos & Associates Inc., studied 6,000 Canadians who filed either a personal bankruptcy or consumer proposal over the course of two years. Not surprisingly, we discovered that many of these debtors were racked with significant student loans that they simply could not repay.

From our study, we learned that 13 percent of insolvent debtors possessed a student loan at the time of their insolvency, with the average loan amount standing at just below $14,000. While this is below the average debt upon graduation of almost $30,000, it is important to realize that this is an amount still owing by graduates after several years of debt repayment. Under bankruptcy law, student debt cannot be discharged (eliminated) in a bankruptcy or consumer proposal, unless the individual has been out of school for at least seven years. That means that the average insolvent debtor still owes almost $14,000 after more than seven years of struggling with debt repayment. Ultimately they find they can no longer meet their student loan obligations and turn to insolvency as a solution.

Furthermore, we also learned that women are more likely than men to struggle with paying off their student loans. In fact, the average female student owed nearly 20 percent more than her male counterpart at the point of insolvency, and 60 percent of student loan debtors overall are women. Finally, the average female’s student debts comprised one-third of her entire debt, signifying how powerful a factor student debt can be on the path towards bankruptcy.

Why High Student Loans Are So Dangerous

In general, significant personal loans can all pose a certain bankruptcy risk to a debtor. Student loans, however, carry specific dangers that often act as a contributing factor towards insolvency: a mismatched risk-to-reward ratio. To elaborate, student loans are often initially incurred without understanding the potential for repayment after graduation.

Is there truly a large risk for student debtors in taking on massive student loans? While each case is different, we discovered that, on average, male and female student debtors who became insolvent earn just below $2,300 per month, 6% below that of the average debtor in Canada. But not only is this beneath the salary of the average Canadian insolvent debtor, it is also generally insufficient to cover a sizeable student debt payment, thus pushing a student debtor towards insolvency.

Student Loans and Bankruptcy

While facing student loans may be daunting, it is important to understand that these debts can, in fact, be discharged in a bankruptcy or proposal, in certain circumstances. In light of this, individuals with insurmountable student loan debt and low incomes should consider learning more about personal bankruptcy and consumer proposals as a structured way towards a new financial future.

Do you have questions about the bankruptcy process and how it can discharge student loans? Do you wonder if a consumer proposal is a viable option to help you deal with student debt and avoid bankruptcy? Our bankruptcy trustees are standing by today to discuss with you the specifics of the process, and to help you in any way we can.

Published on Wednesday, May 13th, 2015