Area of Law: Credit, Debt and Bankruptcy
Answer Number: 253
Student loan repaymentRegion: Ontario Answer Number: 253
In Ontario, the Ministry of Advanced Education and Skills Development administers the provincial and federal governments’ student loan programs through the Ontario Student Assistance Program, called OSAP for short. OSAP offers two kinds of assistance: grants, which is money you don’t have to pay back; and student loans, that must be repaid.
In Ontario, students will submit one application form for both federal and provincial student loans. The student loan is repaid through the National Student Loans Service Centre (NSLSC).
The distinctive feature of a student loan such as OSAP is that the federal and provincial governments pay the interest on the loan from the time that the student borrows the money until the student graduates or ceases to be enrolled at school full-time. That means that interest on the loan does not accrue while the student is attending school. Although some Canadian banks and other financial institutions administer their own student loan programs, unlike OSAP, students usually have to pay the interest on bank administered loans while attending school.
Generally, eligibility for OSAP requires a student to be:
- a Canadian citizen or permanent resident,
- a resident of Ontario, and
- enrolled in an approved post-secondary program.
OSAP provides a list of approved programs and schools as well as guidelines for how a student’s financial need is assessed.
New applicants for OSAP, who are 22 years of age or older, will undergo a credit check by the Ministry. Their position is that applicants are ineligible for OSAP if they have been in arrears for 90 days or more on three or more personal loans in the past three years with a combined value of $1,000 or more. Other reasons a student may not be eligible for OSAP include: they have defaulted on a student loan, they do not meet the academic requirements, they provided false information on their application, or they have declared bankruptcy.
A student whose application for OSAP is denied should contact his or her school’s financial aid office for information about appealing the rejection.
Repaying a student loan
Within six months of leaving school, the student who has been granted OSAP will get a package in the mail from the National Student Loan Service Centre that states: how much is owed on the loan, the expected monthly payment, and the interest rate. This is called a Consolidation Agreement. This legally binding document must be signed and returned to the National Student Loan Service Centre.
Note that while that the federal and provincial governments pay the interest on the loan from the time that the student borrows the money until the student graduates or ceases to be enrolled at school full-time, interest on the federal government portion of the OSAP loan will accrue during the six months following graduation. However, no interest is charged on the Ontario portion of the student loan.
Federal and provincial assistance programs
The Ontario and federal government offer interest relief and repayment assistance programs for borrowers who can demonstrate financial need, and may include those with low incomes following graduation, single parents with young children, or victims of severe medical conditions or trauma. Eligibility is generally based on gross family income and financial assets, and the monthly student loan payment amount.
Stage 1 – Interest Relief: For those who qualify, interest relief programs temporarily cover the interest of a student loan. However, borrowers are expected to continue to make payments toward the principal amount. The school’s financial aid office, which assisted with the loan, will have information on both provincial and federal interest relief programs.
Stage 2 – Debt Reduction (Principal Payment Relief): Under the federal Repayment Assistance Plan (RAP) and Repayment Assistance Plan for Borrowers with a Permanent Disability (RAP-PD), special considerations are given to borrowers with financial hardships and to those with disabilities. Debt reduction is only available after a person has received interest relief for a minimum of 60 months, or has been out of school for 10 years, whichever comes first.
However, individuals with a permanent disability may apply for debt reduction right away, without having received interest relief. In addition, under the federal Severe Permanent Disability Benefit, borrowers with a severe permanent disability may qualify to have their loans immediately forgiven.
Those who qualify may:
- make affordable student loan payments based on their gross family income and family size and/or disability-related expenses. Loan payments do not exceed 20% of a borrower’s gross family income.
- apply payments to the loan principal first; the Government of Canada covers the rest of the payment, including principal and interest.
- not have to make any payments until their income is at least $35,000 (for the 2018 academic year)
- have a maximum repayment period of 15 years, or a reduced period of 10 years for qualified borrowers with permanent disabilities.
Application for federal repayment assistance plans can be made with the NSLSC. Borrowers must apply for the Plan every six months. Enrolment is not automatic.
If a borrower fails to make any payments for 90 days after the OSAP repayment schedule begins, then the loan may be deemed inactive by the bank which issued it. The bank may then seek payment of the loan from the Ontario government. An OSAP loan is considered to be in default when the Ontario government has paid the bank’s claim for an inactive loan.
If a borrower becomes in default for an OSAP loan then there are significant penalties which will affect his or her ability to borrow money in the future. Consequences of being in default include:
- your debt will be turned over to a collection agency
- you will be reported to a credit bureau
- you could be ineligible for further OSAP until the default is cleared
- it can affect your ability to get a car loan, mortgage or credit card
- your income tax refund and HST rebate can be withheld
- interest will continue to accrue on the unpaid balance of your loan.
OSAP debt (including provincial and federal student loans) does not expire. It will only be erased when it has been paid off in full. A school’s financial aid office will have information on the process for addressing and clearing a default of an OSAP loan.
Bankruptcy and student loans
Courts generally give special consideration toward a debt incurred by a government student loan because the failure of a borrower to repay a student loan endangers the program for other needy students. Consequently, borrowers should be aware that it is difficult to discharge a student loan by filing for bankruptcy.
Under Canada’s Bankruptcy and Insolvency Act, the debt incurred by a government student loan will not be released by an order of discharge, if such an order occurs either while the person is still a student or within seven years after the date upon which the bankrupt borrower ceased to be a student. This applies equally to those who are full-time or part-time students.
In some cases, the court, upon application by the student, will release the debt earlier, at any time after five years from the date the student was discharged from bankruptcy or ceased to be a student (either full-time or part-time). In order for the court to allow the early release of the debt, the court must be satisfied that the student: (i) acted in good faith with respect to the student loan debt; and (ii) has and will continue to experience financial difficulties to an extent that he or she will be unable to pay liabilities under the student loan.
Comprehensive information about OSAP can be found from the Ontario Ministry of Advanced Education and Skills Development. More information about federal student loans and the National Student Loans Service Centre can be found from the Government of Canada.
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