It’s unclear how large the student debt default problem is for Canada, but when you ask how graduates end up in the thick of it, you get a remarkably consistent picture.

On Monday, a report published by Ontario-based debt-advisory firm Hoyes Michalos found that almost 18 per cent of the insolvency filings it handled in 2018 involved student debt — a 38 per cent increase since 2011.

Nationally, the share of consumer insolvencies involving student loans has been on a slow but steady rise from 9.7 per cent in 2012 to 12.3 per cent in 2018, according to data provided to Global News by the Office of the Superintendent of Bankruptcy (OSB).

On the other hand, one official tally of default rates on government students loans reveals a decade-long trend of steady declines. Figures from the Canada Student Loans Program (CSLP), which provides Canada Student Loans in all provinces except Quebec, shows the default rate for the 2015-2016 academic year stood at nine per cent, down from a whopping 28 per cent in 2003-2004.

Part of the reason for the discrepancy is an issue of measurement. The OSB data reflects both private and government student loans discharged in a consumer proposal or bankruptcy, which can’t happen for government student loans until seven years after borrowers have finished their studies. CSLP default rates, on the other hand, capture payments missing for nine months or more on Canada Student Loans within the first three years of the repayment cycle.

Confused?

You wouldn’t be the only one. But if you’re wondering what seems to cause Canadians to struggle with their payments, you’ll hear a much more straightforward answer.

“The main reason people default is that their incomes are too low to be able to afford the repayments,” said Christine Neill, an economics professor at Wilfrid Laurier University. 

“It’s people with incomes below $20,000 a year who are much more likely to default,” she added.

That’s far below the earnings potential of Canada’s typical university graduate, but there are two main scenarios in which student-debt holders end up with a low-income problem.

The first is taking out student loans and not actually graduating, according to Neill.

A 2013 paper by researchers at the University of Western Ontario shows that in a survey of student-loan borrowers who had defaulted, around half had not graduated from any kind of post-secondary institution.

The problem with students who borrow but don’t finish their studies is that they may never acquire the skills that would put them on the higher earnings trajectory typical of university and college graduates. In other words, they incur some of the costs of investing in higher education without getting the return that normally comes with it.

The second scenario involves students who finish school but find themselves stuck in low-income employment for a few years after graduation.

“It’s the people whose average income is $2,400 a month after deductions,” said Doug Hoyes, licensed insolvency trustee and co-founder of Hoyes Michalos.

“They’re working at Starbucks as a barista, or they’ve got a couple of part-time jobs, they’re doing an internship and working-part time instead of full-time.”

From cash crunch to debt snowball

Although the cash crunch is usually temporary for graduates, it can quickly create a debt snowball.

“They don’t make enough money to make ends meet so they’re relying on debt credit cards, lines of credit etc. and that builds up,” said Grant Bazian, president of MNP Ltd, one of the country’s largest consumer insolvency firms.

In addition, “a staggering number of insolvent student debtors use payday loans,” according to the Hoyes-Michalos report.

The firm found that 45 per cent of the student debtors it assisted in 2018 at had least one payday loan at the time of their insolvency.

“It’s because they have to use debt to survive,” Hoyes said. “They get credit cards and they max out of those, they get loans and max out of those, and they still can’t keep up with all the payments so the final stop on the train is payday loans.”

Lifestyle inflation is another dangerous slippery slope, said Bridget Casey, founder and CEO of the financial literacy website Money After Graduation.

Buying a new car or starting to save for a down payment on a house straight out of school can be “a huge mistake” for recent graduates if it prevents from making a significant dent in their student debt, she said.

But some of the extra costs may be unavoidable. Suits for job interviews, for example, cost a lot more than the typical jeans-and-sweatshirt campus attire.

In other words, “adulthood is expensive,” as Casey puts it.

A ‘mortgage-style’ system for government student loans

The problem is what Neill calls “a mortgage-style” repayment system for student loans.

“If you look at the profile of incomes [of university and college graduates], it can take a couple of years for people to find their feet and actually get the benefits of their education in a financial sense,” she said.

But student loan programs, much like a mortgage, expect graduates to start paying paying back their debt almost immediately.

“So your payments as a percentage of your income are going to be really quite high in the first year out of university or college and then it gets easier to afford them later on,” Neill said.

On the other hand, the amount of the payments generally stays constant even as graduates’ earnings tend to rise quickly within a few years after the end of their studies, when some may be able to afford to pay more and extinguish their debt faster, Neill said.

The government’s Repayment Assistance Plan is a lifeline — but not everyone knows about it

While the default repayment system for student loans works like a mortgage, the government’s Repayment Assistance Plan (RAP) lets struggling graduates pay less — or nothing at all.

Canadians can apply for RAP as soon as they start to repay their student loans and, depending on their income, may be allowed to pay no more than 20 per cent of their income or make no payments. The government, meanwhile, pays the interest owing on the loans that the lower payments do not cover.

After five years of RAP or 10 years after finishing school, whichever comes first, the government begins to cover both the principal and interest that exceeds the reduced monthly payments. Repayment obligations do not exceed 15 years.

In addition, the Liberals’ 2016 federal budget changed the RAP’s repayment threshold so that no student has to repay their Canada Student Loans until they are earning at least $25,000 per year.

Enrollment in the RAP system, which was introduced in 2009, has been growing, with over 300,000 borrowers receiving help through the program in 2016-17, up 17 per cent from 256,000 in 2014-2015.

“What would the default rate have been without RAP? No one knows for sure, but a lot of people use RAP,” Saul Schwartz, a professor at Carleton University’s School of Public Policy and Administration, said via email.

Still, RAP remains a “cumbersome” system, Neill said. Participants, for example, must reapply for aid every six months to remain enrolled in the program.

Besides, many remain unaware of it, said Casey.

“A lot of people don’t know how much the government is willing to work with you to make adjustments,” she said.

And if borrowers miss nine months or more of payments, it becomes “much harder” to get into RAP, Neill said, as borrowers in default must rehabilitate their debt in order to participate the program.

“Getting rid of the need to reapply every six months would be a good idea,” Schwartz said. Automatic enrolment, he added, would be “even better.”

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