CSLP Interest Relief Program and “Debt Reduction”

While student loan borrowers are in school, the federal government pays the interest on their CSLP loans. As soon as the student leaves school, the interest subsidy stops and interest begins to accumulate. Upon leaving school, however, borrowers are allowed a sixmonth grace period during which no repayments are required.

The IRP is available to borrowers who are trying to pay back their CSLP loans and who have low income. Initially, borrowers are eligible for three months of interest relief; borrowers must apply for additional three-month extensions as necessary. While on interest relief, borrowers make no debt payments; when their eligibility for the program comes to an end, the amount of principal owed is unchanged from when they entered. Since 1995, the IRP has been managed by the private lenders on behalf of the government, as part of the “risk-sharing” agreement described above.

Historically, the IRP has not been widely used. In the 1997 Goss Gilroy survey of student loan defaulters, only one-third of them had even heard of the program. Now that the program is managed by lenders who have no government guarantee of repayment, the use of the IRP is expected to become much more widespread.

Prior to the 1998 changes, the IRP was available to eligible CSLP borrowers for up to thirty months within the first five years of repayment. The Budget Implementation Ac tof 1998 repealed the
provision that restricted the availability of interest relief to the first five years of the repayment period, which typically lasts for ten years after the borrower leaves school. The IRP is now available over the entire repayment period. If borrowers exhaust the thirty months of interest relief and are still not in a position to repay their loans, interest relief can now be extended for up to another twenty-four months. In addition, starting in April 1997, the eligibility-defining income thresholds were increased by 9 per cent, making more borrowers eligible.

For those with income below the now higher thresholds, partial interest relief will be introduced in 1999. Depending on income, the CSLP will pay 75 per cent, 50 per cent, or 25 per cent of the interest. The overall impact of these changes, in theory, is to make the IRP more generous. The monthly dollar outlay for CSLP loan repayments should be more sensitive to the borrower’s income. The practical impact of the changes depends on how they are implemented and on whether borrowers avail themselves of the program.

Several provinces most notably Ontario have student loan forgiveness programs. If the amount borrowed exceeds a certain level, the portion in excess of that level is forgiven. In Ontario, as of 1999, any amount borrowed before the 1998-1999 academic year from the CSLP and the Ontario loan program totalling over $7,000 in any one year is forgiven if the borrower applies to the debt remission program. Effective on 1 August 1998, the CSLP introduced a measure of loan forgiveness known as “debt reduction in repayment.” If a borrower has exhausted all the aid available from the IRP, and if the payments due on the CSLP loans exceed 15 per cent of income, then part of their CSLP loan the smaller of $10,000 or 50 per cent of the principal can be forgiven.

These changes to the IRP, and the introduction of a measure of loan forgiveness, have the welcome effect of introducing a larger measure of income sensitivity to the student loan repayment process. That income sensitivity acknowledges the importance of low earnings in creating problems for those in repayment.
At least theoretically, the institution of a student loan system in which repayment is fully income contingent (as are the student loan systems in Australia and New Zealand) would have been even more welcome. However, such a change once proposed as part of former Minister of Human Resources Development Lloyd Axworthy’s package of social security reforms seems politically impossible, given widespread student opposition, the lack of provincial enthusiasm, and the 1995 introduction of “risk-sharing” by the CSLP. In that context, the 1998 changes to the IRP and the federal loan forgiveness measures may have been the only feasible steps in the direction of income-contingent loan repayment.

Despite the increased income sensitivity of the CSLP programs, however, there will still be borrowers who are unable to repay their student loans. Some will be borrowers who have loans from provincial programs that are not covered by CSLP interest relief. Others will be borrowers who exhaust their five years of interest relief eligibility and have their debts reduced, but who are still unable to pay the remaining outstanding balances. If economic growth continues, these borrowers may be few in number; if not, more loans may have to be forgiven.

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