Dealing with student loan debt

As reading week passes, graduating students start to contemplate their futures outside the halls of academia and one of the most prominent things on their minds will be paying off their student debts.

Their educations have largely been paid for through a combination of gifts (scholarships from schools or organizations, and/or monetary offerings from parents and relatives), and grants and loans from government sources.

In Ontario, that is handled through the Ontario Student Assistance Program (OSAP) and on graduation or leaving post-secondary school, students have to pay at least some of it back, and maybe all of it.

Ontario caps the amount a full-time student is asked to pay back, based on economic factors such as family income. Students in a two-term academic year have to pay back up to $7,300; those in a three-term year, $10,950. If students require more than those amounts, respectively, the difference is made up through the Ontario Student Opportunity Grant. Consideration for that grant is automatic, so there are no additional applications required.

However, if you don’t finish your academic year and got a grant, you may be required to pay that amount back in addition to the $7,300 or $10,950. You may also be required to pay more than the set cap if you don’t file an income tax return, or if any family member listed on your OSAP application doesn’t file a return, or if an audit of your application reveals that you were awarded more than you would have been entitled to.

As with any other form of debt, the longer you take to pay off your student loans, the more it will cost.

There is a six-month grace period after graduation (or after leaving college or university without graduating) during which loans can be paid back, mostly without interest. In the seventh month, a payment schedule is brought into effect.

The way it works is that shortly after graduation, the student will receive a letter from the National Student Loan Service Centre outlining the amount owed, the interest rate charged on the debt and the expected monthly payment according to terms for paying back the amount owed. Payments start at the end of the seventh month after leaving school.

Payment schedules can range from 10 to 15 years and they aren’t set in stone, which means that you can apply to alter them according to your earning status — pay more if you are earning more; have them reduced if you can’t afford to make them.

Repayment assistance through Ontario’s Repayment Assistance Plan (RAP) is available to those who can’t afford to make payments. The repayment amount is recalculated based on the amount owed and your family size and income. Your monthly payments are reset to a lower amount and then grow as your income grows, up to a maximum of 20 percent of your family’s earnings. Those with very low or no income are entitled to a suspension of monthly payments until their family income grows to a certain level.

Students can also chance the term of their loan repayment scheduled by applying through the National Student Loan Centre.

One last thing to remember: the amount owing on your student loan will never be discharged until it’s paid off in full. The only possible exception is if you declare bankruptcy and have been out of school for longer than five years, in which case you can apply to have your debt discharged through a bankruptcy court.

Outside of that possibility, you are still required to make your monthly payments on your OSAP loan even in bankruptcy, though you can make changes to them through the repayment assistance measures listed above.

 

Retirement savings untouchable by creditors, sort of

One of the main concerns of paying off creditors is the thought of compromising your financial future in settling debts in the present. In particular, people are worried that creditors will seize all or part of their pensions in order to settle debts.

The good news is that in most cases, creditors are not allowed to touch your retirement income. The bad news is that in some cases, mostly depending on where they live, the type of retirement fund they hold and the creditor making the claim, money set aside for retirement can be used in the settlement of your debts.

First among the variables is the province of residence. Although there is federal government protection of retirement savings under provisions in the Bankruptcy and Insolvency Act, it depends on the laws of the province or territory when it comes to shielding your investments from creditors. British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, and Newfoundland and Labrador have laws mimicking the federal regulations.

In most cases, the funds are protected unless you file for bankruptcy, in which case a trustee gets to decide how to liquidate them in order to settle debt. In the cases mentioned above, the trustee can only look at savings acquired within 12 months leading up to the filing for bankruptcy. In some provinces, there are no time restrictions and in others, funds are locked in and sheltered regardless of the date of bankruptcy filing.

That’s where the type of retirement fund comes in. Some companies provide pension plans and put funds on behalf of the employee into either locked-in RRSPs (Registered Retirement Savings Plans) or RPPs (Registered Pension Plans). Those funds are generally protected from creditors either in a bankruptcy or outside of it. The rule of thumb is that if you don’t have access to locked-in funds, neither do your creditors.

However, you can lock in your self-directed RRSPs or GICs (Guaranteed Investment Certificates) for a set time and when the locked in period expires, they are accessible. The exception in terms of self-directed retirement income savings are RRIFs (Registered Retirement Income Funds) held in a life-insurance contract provided that money isn’t deposited in order to deliberately shelter it from creditors, proof of which must be determined in the courts.

In general, your government issued retirement earnings — Old Age Security (OAS) and CPP (Canada Pension Plan) or QPP (Quebec Pension Plan) — cannot be touched by creditors. There are, of course, a few exceptions.

The primary one is, naturally, the CRA (Canada Revenue Agency), whose broad sweeping powers allow it to tap into whatever means it deems necessary in order to settle tax debts. The CRA will simply send a letter of direction to Employment and Social Development Canada (ESDC) — the administrators of OAS and CPP programs — and/or your bank with instructions of how much to withhold to settle your debts. The amount can be negotiated with the CRA.

Your bank can also have access to those funds if you owe them money due to mortgage or credit card debt, and can tap into the accounts into which you deposit the pension or retirement funds. Again, locked-in funds aren’t touchable but if you release those funds into an account with the bank to which you owe money, they can be seized.

Your ex-spouse is another exception, in the case of money owed either as part of a separation or divorce settlement or because of not fulfilling your support obligations (spousal or child). Up to 50% of your pension can be tapped into to make up owed money, but you can petition the courts to reduce or eliminate the debt owing.

 

Can creditors get into my bank account to collect?

One of the most frightening jolts you can get financially is to go into a bank account to see if you have enough to cover off a payment only to find a zero balance.

You’re in financial hardship; you’re juggling payments to make sure one doesn’t get too far behind; you’re trying to pay as best you can and in one fell swoop, you’re left with zero and you don’t know if you’re going to be able to pay the rent or make the car payment. What happened?

In all cases, it’s because one of your debts is to your bank (a mortgage, loan, credit card or line of credit) and they have the right to take what they can to pay off some or all of the amount owed to them, even if it leaves your bank account empty. And pleading your case won’t do you any good because their payment is more important than all the other payments you may have.

When you borrow money, there are two types — secured and unsecured. Secured debt is a loan that is borrowed against some property — a house, a piece of furniture or a car, for example — and the creditor has the right to seize your property and (with notice) sell it off to pay off your debt. A mortgage is the best example of a secured contract — if you don’t make your payments, the bank can repossess your house and sell it to pay off the amount owed. A financed car purchase is another example, where the dealership technically owns your car until the last payment is made.

A credit card is unsecured debt. Even though you fill out an application that indicates you have a mortgage (maybe with the same bank) and/or a car, the credit card company can’t seize your house or your car to pay off the amount outstanding to them. What they can do, is take money directly out of an account you may have with that bank.

And if you get wise to this and don’t leave any money in that account until such time as it’s needed to make other payments, they may get wise to your ways and garnishee (or freeze) your account, in which case deposits are allowed but withdrawals are not (whether those are cash withdrawals or automatic transactions).

Banks don’t have to notify you before this happens because they don’t have to get permission from a court to do this. Neither do government agencies (if you owe back taxes or support), but other creditors have to sue you in order to gain access to your accounts.

They usually send you notice that they are considering the action and if you don’t act on it, they will file a suit to recover what is owed, including gaining access to your accounts. If you are sued, you have to go to court in your own defence and if judgment is awarded to the collector, you will have to pay all fees and costs, in addition to the debt and related penalties.

It should be noted that there is a statute of limitations on owed debt, which in Ontario is two years after the last payment was made. If you have unsecured debt and haven’t made a payment in two years, and your creditor hasn’t sued you to recover the money, the threat of a claims suit is not valid. If they do attempt to sue you, you may still have to go to court in defence and plead the expiration of the limitation on your unsecured debt.

It is important to note, though, that if you make a payment (regardless of whether it’s a bluff) — even a small one — the two-year clock resets and they can then initiate a suit for all the money owed.

 

Use and demand respect when dealing with collection agencies

Everybody dreads calls from collection agencies, but there are certain guidelines collection agencies must follow in dealing with debtors and there are certain things consumers can do to protect themselves from the harassment some collection agencies employ.

First of all, let’s understand why collection agencies do what they do. They have been hired by creditors to get payment as quickly as possible from debtors. For their efforts, they get a fee or commission from the company whose debt they’re collecting. As such, the best way to get collection agencies out of your hair is to pay off your debts as quickly as possible.

Collection agents are allowed to contact you in order to make you aware of the debts you owe and are allowed to use reasonable means to collect. They don’t have to explain your rights to you, and if you’re ignorant to those rights they may overstep the boundaries within which they are required to operate.

Collection agents are required to send a physical letter explaining who they are, who they represent and the debt they are attempting to collect. Six days later, they are allowed to contact you in person or by phone. After making contact with you (in person by email or through a voice mail — a physical letter is not considered contact) an agent must limit contact with you to three or fewer times in any seven day period, without your consent.

The glitch is that if you don’t answer the phone and if they don’t leave voice messages, it doesn’t count as contact. In that case, you could have the same number ring up to several times a day as often as they want.

Collection agents cannot contact you at all on holidays or on Sundays except between 1 and 5 p.m. They also cannot contact you between the hours of 9 pm and 7 am on any other day.

And they can’t contact your family members, relatives, neighbours or friends except to ascertain your address and phone number. And, they can’t contact your employer except one time to get your employment information. The exception in all cases is if the other person has guaranteed your debt, in which case they are subject to the same collection contact protocols, or if you have given the agent permission to contact them.

Collection agents are also not allowed to use threatening, profane, intimidating or coercive language, to put undue, excessive or unreasonable pressure on you to pay off your debt, harass you about your debt and obligations, or to give out false or misleading information about you to others.

If you feel a collection agent has acted inappropriately, send off a letter (by registered mail so you know they’ve received it by signing for it) explaining in detail what you feel the transgressions were and how you expect the agent to comply with the law (in Ontario, according to the Collection and Debt Settlement Services Act). You can also file a complaint with the Ministry of Consumer Services.

Another thing to keep in mind is that there are several websites that recommend how you deal with collection agents, but some of them are obviously created by people who have had bad experiences with agents. As with all things, be informed but get your information from credible sources, such as federal and provincial consumer agencies.

 

Teaching kids financial responsibility

One of the things we constantly preach about in terms of savings is to start early in order to make it easier to budget and maximize your investment, and the same thinking applies to learning financial responsibility — start learning early.

Now, it may be a bit late for readers of this column, but you can “pay it forward” by teaching your children the importance of watching their finances, both in terms of budgeting their daily spending effectively and also saving for the things they want.

It’s still fine to hand over a couple bucks, but many homes have done away with the action of simply handing over a few bucks to children, simply “allowing” them to be children. The fact is that in today’s consumer market, money does not go far, so it’s important to teach children (a) the value of money, (b) how to budget, and (c) how to save.

Teaching the value of money is not as easy as saying “money doesn’t grow on trees.” I prefer “money is so hard to earn and so easy to spend.”

Keying in on the first part of that statement, give your child a chance to make more money. Say you give your child $5 per week as a “base salary.” He or she gets this just for being your kid. The idea is that some things are expected for this allowance — just as you cook meals for your family and run the vacuum around, they are expected to get themselves ready for school on time, brush their teeth and hair every day, bathe regularly and keep their rooms in some sort of order.

But then also give them the chance to earn more money — a commission, so to speak. Cleaning up their rooms once a week may be worth another dollar, putting their dirty clothes in the laundry room hamper may be worth a dime, putting away clean clothes in the dresser could be worth another dime, loading or emptying the dishwasher may be a 25-cent task, hauling the trash to the curb is worth a quarter, etc.

This shows them that working harder earns more money — a lesson that will resonate well with them when they get out into the working world — and that they can control their own earnings. At the same time, you can teach them the basics of handling money.

A good way to start is with the jar theory of budgeting, where you literally label jars or envelopes “groceries,” “gasoline” and “fun,” as examples, and then put actual money (the ubiquitous debit card is making the whole thing harder too!) in them to cover those costs as they arise, taking out the exact amount of money to pay.

For children, you can start off with something as simple as a jar labelled “spend” and another labelled “save” and have them break off their earnings into cash they want to spend right away and money they want to save up for something bigger. Depending on your values, you may want to add a third jar — give — to illustrate the importance of charity.

So at the end of the week, instead of handing over a $5 bill, for example, give them five loonies and they have to put at least one in each of the jars. This teaches them planning — you can choose to save just one dollar and spend the rest, but then reaching that goal of a new video game, for example, will take a considerable amount of time. Similarly, they may choose to bank $3 toward that video game more quickly, but then they will only have enough for one chocolate bar, for example. They can also move money between the jars, so if they find themselves short halfway through the week, they can take some out of their savings, or if they have surplus cash-on-hand, they could choose to add it to their savings. The “give” jar, if you have one, should be regarded as untouchable — what goes in there stays in there.

As kids get older, you may want to introduce more financial responsibility into their lives, such as giving teenagers a back-to-school lump-sum payment and allowing them to spend it on clothes, shoes and backpacks as they see fit, rather than dragging you to the store and expecting you to buy name-brand everything because “that’s what all my friends are getting.”

It’s fairly simple and kids get an idea of the gives and takes of money handling. In the process, you may also find that breaking down the handling of money into simple terms makes budgeting a lot less complex.