Since 1994-95, the impacts of soaring tuition fees on students who attend—or can’t afford to attend—universities and colleges in Canada have been well-publicized. So have the wide-ranging spinoff benefits to countries that provide more generous financial support to their institutions of higher learning—benefits acclaimed by organizations on the right as well as the left of the political spectrum. The World Economic Forum, for example, has cited adequate investment in higher education as a driving factor in the productivity of the Scandinavian countries.
In Canada, however, even if by some miracle tuition fees were rolled back or eliminated tomorrow, it would do nothing to alleviate the financial distress of the thousands of graduates still heavily burdened with student debt.
The escalation of tuition fees (up to $5,000 a year in many provinces) has garnered some political, public, and media attention, but the desperate plight of graduates--many of whom are staggering under debt-loads as large as the mortgages their parents started out with--continues to be ignored.
However, even people with mortgages or car loans rarely encounter the problems that graduates have to endure with the administration of student loan debt. The level of service being provided to graduates is far below the standards provided by other lending systems.
Student loan legislation was written by a different generation in different times, when high-paying jobs were more numerous, when a “huge” student loan was $10,000, not $60,000, and when the average annual tuition fee was $875, not $4,500. In no other lending sector would you be in a position of owing $60,000 and not being able to obtain a statement of your payments and interest charges, or even your balance. Here are some of the other defects of the current Canadian student loans system:
Parental Support: The student loan application process takes into account the student’s parents’ income, but incorrectly assumes that the parents have paid off their own student loans. With the sharp increase in debt levels, student loan debt has become inter-generational. A couple who marry in their 20s may not have paid off their loans by the time their children are ready for university.
Privatization: Until the early 1990s, the National Student Loan Centre was staffed by public servants, with few complaints from students and borrowers. Then, inexplicably, this well-functioning program was outsourced to major banks, which soon started abandoning student loans. The federal government, recognizing the need for another national student loan centre, decided to outsource it to a company called Edulinx, a subsidiary of the Canadian Imperial Bank of Commerce. This resulted in serious service quality problems, defaults due to lost documentation, faulty fax machines, and poorly trained staff. The CIBC responded to numerous complaints by selling Edulinx to Nelnet, a subsidiary of a U.S. firm. In 2005, the contract was won by Resolve Corporation, a branch of another American company more concerned about increasing profits for its shareholders than properly administering Canada’s student loan program.
Multiple loans: With the changes in programs (government, risk-shared and guaranteed bank loans, national student loan centre direct loans, and provincial counterparts), graduates can find themselves with up to six different loans. Many graduates are unaware of this and negotiate their loan in good faith--only to find that additional loans are outstanding. This also means that defaulted borrowers may face calls from up to six different collection agencies—all of which makes the repayment process so unmanageable and frustrating that many debtors simply give up trying to work with the system.
High interest rates: The interest rate on student loans is much higher than the rate charged on other types of loans. Car financing can be obtained for 0%, a mortgage at close to prime, but student loans are financed at as much as prime-plus-5%, even though the government’s cost of borrowing is substantially lower. In many cases of default, it is not the loan itself that is the cause, but the exorbitant interest rates being charged on the loan. Some borrowers find themselves still owing as much as 90% of the principal on their loans even after paying the equivalent of the full amount in interest.
Lost documentation: When the National Student Loan Centre and participating banks lose students’ continuation of enrolment forms and Interest Relief applications—as they have done many times in the past--thousands of borrowers over the last 10 years have been defaulted, denied interest relief or debt reduction, and harassed by collection agencies, with the full amount of the loan due immediately. The current legislation needs to be changed so that the NSLSC can no longer use the “student’s responsibility” clause to avoid accountability. In some cases, this clause has been invoked by the NSLSC and banks even though documents were allegedly sent by registered mail and signed as received with the signature confirmation.
Credit reporting: Student Loan Credit reporting has failed to act as an incentive to pay student loans. In some cases, as a result of errors on the part of NSLSC and the banks, it has actually forced some students out of school because they have been denied funding due to incorrectly reported defaults. Even if the NSLSC or the banks admit to making an error, it is virtually impossible for a borrower to have that incorrect student loan information removed from the credit report. This has far-reaching ramifications, including instant and prolonged damage to one’s credit rating.
Student loans and mental health: I have heard countless stories of students frantically trying to resolve NSLSC errors so that they can continue their schooling, and missing studying time while they sort out the problems of receiving a default notice during the exam period. Clearly this stress has a negative impact on students’ education and perhaps their marks, as valuable study time is wasted dealing with problems caused by NSLSC errors and lost documentation. As moderator of Canadastudentdebt.ca I have had to intervene in three separate cases of possible suicide attempts due to overwhelming debt, a sense of hopelessness, and the abusive and aggressive actions of collection agencies. Borrowers in repayment suffer mental health breakdowns as a result of the overwhelming debt, harassment, and the fact that they can never seem to make progress despite their best efforts.
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Based on the serious problems raised above—and many others not mentioned because of space restrictions--members of Canadastudentdebt.ca and the Coalition for Student Loan Fairness urge the federal government to take the steps necessary to create a more fair student loan program, to remedy the harm done to borrowers, and to provide meaningful help for those who need it.
I recommend the following 8-point plan to restore the integrity, efficiency, and fairness of the Canada Student Loan Program.
Point 1 – Significantly reduce or eliminate the interest rate on student loans.
Borrowers are faced with interest rates of 8.75% to 11.25%, yet the government’s cost of borrowing is only about 4%. Borrowers who are required to pay their loans over 8 to 10 years end up paying interest of over 33% or more of their principal over the lifetime of the loan. Borrowers experiencing hardship who opt for interest-only payments pay even more. Reducing the interest rate would lower defaults and collection costs. To be equitable, the interest rate reduction needs to be applied to all outstanding student loans, regardless of the outsourcing organization holding the loan.
Point 2 – Improve access to grants, interest relief and debt reduction.
Eliminate or significantly increase the limit on the total allowable months of interest relief available to assist borrowers with persistent financial difficulty. Increase the income threshold and use net income for determination of eligibility. Adjust the income level threshold annually to reflect inflationary increases in the cost of living. Allow borrowers to apply for interest relief on-line to make the application process more efficient and timely. Improve promotion of the Interest Relief Program to ensure that all borrowers who need interest relief are aware of the program, what it does, and who is eligible.
Point 3 – Create a Student Loan Ombudsperson Office.
Borrowers have had great difficulty getting errors investigated and corrected. Similar to the recently appointed Veterans’ Ombudsman, create a Student Loan Ombudsperson Office with legislative powers to investigate issues such as lost documentation, payment processing errors, and incorrect defaults, while also ensuring timely and correct credit bureau reporting and eligibility for interest relief and debt reduction. The Ombudsperson’s Office should have the power to prescribe resolution procedures that will be binding on various outsourced service providers, including the National Student Loan Centre, banks involved in risk-shared and guaranteed loan programs, and their outsourced companies--as well as credit reporting bureaus. The Ombudsperson must also be viewed as part of a larger campaign to improve the education and awareness of student loan borrowers about the financial commitments involved in taking out a student loan.
Point 4 – One graduate, one loan, one payment.
Due to the number of program changes over the last 10 years, graduates may have up to six different loans (provincial and federal loans for each of risk-shared, guaranteed, and direct lending programs) and have to juggle up to six different payments. If in default, there are up to six different collection agencies demanding payment. Some borrowers have been unable to determine who actually holds their loan(s) because of the outsourcing of collections and reassignment of accounts. Graduates should have one integrated loan and one payment. When the program is established, existing student loan balances should be transferred to the new integrated loan.
Point 5 – Provide up-to-date and accurate statements.
Graduates need to know how much they owe, that their payments are being applied, and that interest is being charged appropriately. There is now no way to get an accurate and timely student loan statement. Some graduates have had to file Freedom of Information requests to get statements. We need an accountable system that charges interest correctly and applies payments in a timely manner. The program needs to provide accurate statements on request and provide online real-time access to statements, ensuring that borrowers have an up-to-date account of their loan.
Point 6 - Enforce collection directives.
The Student Loan Collection Directives are not being enforced. Numerous complaints have been filed against abusive collection agents who improperly threaten legal action, have been verbally abusive, and have violated provincial collections guidelines. Business Practices and Consumer Protection Acts, or Acts which govern the conduct of collection agencies across Canada, should be harmonized so that Canadians nationwide can receive the same respectful and consistent service no matter where they live in the country.
Point 7 – Provide hardship relief.
Sometimes bad things happen to good people through no fault of their own. For those who negotiated loans between August 1995 and July 2000, disability relief is only available to those who became disabled within the first six months after graduation. Even if one qualifies, the process of applying is onerous and usually requires many appeals. For those who have extenuating circumstances, the option of bankruptcy has also been removed. There needs to be some method of helping those most in need.
Point 8 – Reinstate the six-month interest-free grace period.
Previously, graduates were given a six-month interest-and-payment-free period to allow time to search for employment. The current grace period does not require payments, but interest is charged, resulting in a 3.5-4% premium on their loan that is capitalized. The six-month grace period on interest needs to be restored.
(Mark O’Meara, M.Ed., is the founder and moderator of www.Canadastudentdebt.ca – This article is a summarized version of his longer and more detailed paper, the full text of which may be found on his website.)