Recent legislation has introduced a number of changes to the process by which student loans are repaid. Of most interest and most surprising to those involved with personal bankruptcy was the provision in the 1998 federal budget that announced the government’s intention to make student loans non-dischargeable for a period of ten years after the completion of full-time studies. Just a few months earlier, and after a long series of consultations, a series of amendments to the Bankruptcy and Insolvency Act (BIA) had been passed by Parliament. One of the amendments introduced a two-year “waiting period,” following the end of full-time studies, during which student loans could not be discharged.

The unanticipated introduction of a ten-year waiting period, so soon after the introduction of the two-year waiting period, led to protests by insolvency professionals represented by the Canadian Bar Association (CBA) and the Canadian Insolvency Practitioners Association (CIPA)—who felt that the results of the lengthy consultations had been unwisely disregarded. Why might the government have implemented this new ten-year waiting period? No answer to this question has been made public, but some speculation may be in order.

First, the ten-year waiting period, if it does nothing else, will bring an end to stories of young professionals, just out of school, brazenly declaring bankruptcy in order to have their student loans discharged. It may not have mattered that the number of such cases was extremely small, or that judges had the discretion to order only conditional discharge of student loan debt

Second, other changes to the CSLP loan repayment programs, discussed below, were introduced at the same time. These changes seem to have been intended to create a situation in which bankruptcy was unnecessary for those with student loans to be sure, if a potential bankrupt’s only debts were CSLP loans, bankruptcy would rarely be necessary. It is, however, unusual to find debtors whose only debts are to the CSLP. Other debtors, as the CBA and CIPA representatives pointed out in their Senate testimony, may simply be forced to return to the bankruptcy court, ten years after a first bankruptcy, seeking to have the remaining balances on their student loans both federal and provincial discharged.

For a number of reasons, the possibility of saving public funds was probably not a major consideration. The financial cost of the other changes will far exceed the value of the student debt that would have been discharged through bankruptcy. As well, just because student loan debt now survives bankruptcy does not mean that the loans will be repaid. Moreover, in the wake of the risk-sharing agreements of the early 1990s, loan losses are not, by and large, borne by government. As such, it is the lenders who would benefit from these hypothetically greater loan repayments, not the public coffers.

Regardless of the government’s rationale for introducing the tenyear waiting period, the empirical evidence presented above suggests that most of those seeking bankruptcy protection with student loans among their debts have very low incomes and no guarantee of higher future incomes. Waiting ten years is not only unlikely to change their economic situation, but will deny them the “fresh start” that is one of the
aims of the BIA. In my view, a waiting period, whether of two or ten years, is neither necessary nor desirable
The waiting periods also violate one of the principles that have guided the BIA reform process, on-going since 1992. As the CBA and CIPA representatives made clear, great efforts had been made to reduce the extent to which any one kind of creditor received special treatment under the BIA. By creating special provisions for student loans owed to commercial banks and governments, the 1998 changes move away from this goal.
Supposing that deletion of the waiting period from the BIA is not in the cards, one way forward is to push for the introduction of a “hardship” clause that would allow judges to shorten the ten-year waiting period if the borrower is experiencing substantial hardship.

There is even a natural starting point for defining “substantial hardship”: that the borrower has participated in the CSLP Interest Relief Program (IRP), but still shows no signs of being able to repay. The lengthening of the period during which student loans would be non-dischargeable was only one of a number of changes, most of
which were aimed at lightening the burden of student loan repayment by providing more relief to those with low incomes. These included (1) expanding the range of borrowers eligible for the IRP and increasing the
amount of relief available; (2) providing for a measure of loan forgiveness to CSLP borrowers who exhaust their eligibility for interest relief and who still have difficulty making payments; (3) creating federal
tax credits for interest paid on both federal and provincial student loans; and (4) establishing two new grant programs.

Two features of the Canadian student loan system should be kept in mind as these changes are discussed. The first is that there are two kinds of student loans: loans made as part of the CSLP, and loans made under provincial student loans programs. Most student loan borrowers have loans from both federal and provincial programs, but the changes to the IRP and the introduction of loan forgiveness apply only to CSLP loans and not to provincial loans. The provincial loan programs have their own debt relief programs, which tend to involve loan forgiveness more than interest relief. Second, CSLP loans made after August 1995 are largely the
responsibility of the private banks, which had accepted a 5 per cent “risk premium” in return for bearing the responsibility of debt collection. Several provincial loan programs have also negotiated “risk-sharing” agreements similar to that of the CSLP. The provision of publicly-funded interest relief to student loan borrowers (and the extension of non-dischargeability from two to ten years) may give substantial benefits to
student loan lenders, rather than to the government.

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