Government Student Loans, Government Debts and Bankruptcy: A Comparative Study — Part 1

1. Canadian Context

A central facet of the Canadian consumer bankruptcy system in its current form is the individual's right to a "fresh start" provided by the bankruptcy discharge. Following bankruptcy an individual is free from most of her debts and at the same time retains her experiences, knowledge, and values, often referred to as human capital¹, which can contribute to her becoming a productive member of society again. However, a number of exceptions to the bankruptcy discharge are provided for under existing legislation². These exceptions apply to both bankruptcies and consumer proposals under the BIA. While a literature has developed around the justifications for a mandatory, or non-waivable, bankruptcy discharge, a comprehensive normative theory of the appropriate scope of the discharge and accompanying exceptions has eluded commentators for some time now. A common explanation for this list of debts is that they all concern fraud or similar misbehaviour against creditors and excluding them from discharge is intended to deter this conduct. However, the list excludes a large number of "wrongdoers," such as bankrupts who have committed torts other than the three that are listed. In particular, bankrupts who owe tax and non-tax debts to the government, such as unemployment insurance overpayments or small business loans, are not included in the list. There is no obvious rationale for this list of debts.

Government Student Loans³ are found in the existing list of exceptions to discharge.⁴ The primary justification for the enactment of the exception to discharge for Government Student Loans in Canada was that without it a significant number of students were blatantly manipulating the bankruptcy system by finishing their post-secondary studies, and then going bankrupt to erase their Government Student Loans before profiting from professions such as law or medicine.

A. Overview of Government Student Loans

In Canada, students who cannot afford the cost of a post-secondary education rely on a range of credit products to fund their studies. Many students (and parents) use lines of credit, extended mortgages, private loans, and credit cards to fund their education. The only form of student credit that is not based on a positive past-credit history and accordingly is most accessible to students from low and middle-income families, is a Government Student Loan. Government Student Loans are made based on assessed student need, and do not charge interest while students are engaged in part- or full-time studies. In 2003, 42 per cent of all post-secondary students relied on federal Government Student Loans⁵. Out of these students, 58.8 per cent were women and 41.2 per cent were men⁶. Approximately 16.8 per cent of the student borrowers were high-need part-time students, high-need students with permanent disabilities, females pursuing doctoral studies or students with dependents⁷.

Government Student Loans are provided to students based on federal-provincial partnerships in nine provinces and the Yukon⁸. In these participating provinces and the Yukon, provincial and territorial student assistance offices administer the front end of both provincial and federal student loans. Generally, students hold two separate Government Student Loans: a provincial loan and a federal loan. However, pursuant to Canada-Provincial Integrated Student Loan Agreements,⁹ four provinces – Ontario, Saskatchewan, New Brunswick, and Newfoundland – have integrated their student loan programs with the federal program such that students receive only one loan funded by both the federal and provincial governments. This loan is subject to the terms of the federal student loan program.

The federal government directly finances all federal student loans issued on or after August 1, 2000 through the National Student Loans Service Centre (NSLSC).¹⁰ Provincial or territorial student assistance offices review both federal and provincial loan applications, confirm eligibility, assess financial need, and determine the amount of funding students will receive. The NSLSC processes loan documents, arranges for loan funds to be deposited to the student's bank account, keeps track of the total amount of the loan throughout the student's studies and the amount she will have to repay, sets up a loan repayment schedule, and administers debt-relief programs. Under the current scheme, there is no maximum repayment period, but a typical repayment period is 9.5 years.¹¹ Students are entitled to a six-month grace period after leaving part or full-time studies before having to make payments on their loan.¹² However, interest accrues on the loan during the grace period.¹³ Following the grace period, for provinces that have not reached Canada-Provincial Integrated Student Loan Agreements, students are required to consolidate their provincial and federal student loans and to decide on a fixed or floating rate of interest to repay their loans.¹⁴

Following the 1998 federal budget, a number of forms of relief were introduced, or expanded, for students having trouble repaying their Government Student Loans due to financial hardship. These forms of relief are still in place today. Prior to regulatory changes enacted in 2004 and 2005, these options were extremely limited as they were only available to borrowers with loans in good standing and also imposed very low income thresholds. The 2004 Amendments replaced the good standing requirement for obtaining relief with more lenient specific eligibility requirements and also increased the amount of available relief.¹⁵ The 2005 Amendments increased the income thresholds for obtaining relief by five per cent and also further increased the amount of available relief.¹⁶ While the 2004 and 2005 Amendments have extended eligibility and increased the amount of assistance provided through the government's debt relief programs, the requirements for obtaining relief remain complex and the income thresholds remain relatively low. It is still too early to determine the impact of these amendments.

The central form of relief is Interest Relief.¹⁷ Interest does not accrue while a borrower is receiving Interest Relief. This form of relief is based on gross family income, family size, and the principal owing on student loans. Interest Relief is typically granted for six-month periods, up to a maximum of 30 months, throughout the lifetime of the loan. Extended Interest Relief,¹⁸ which is available to students who are unable to make payments within five years of leaving school, extends Interest Relief benefits for up to an additional 24 months. The government may also agree to a revision of terms¹⁹ and extend the loan repayment period or reduce monthly payments for a short period of time.

Two other "last resort" forms of debt-relief are available to students: the Debt Reduction in Repayment Program and the Permanent Disability Benefit. Under the Debt Reduction in Repayment Program, where a student has exhausted all other avenues and has been out of school for five years, she may apply to have her loan principal reduced. If approved for the program, she could be eligible to receive an initial reduction of up to $10,000; and if she continues to experience financial difficulty, she may apply for a second and a third reduction in amounts of up to $10,000 and $6,000 respectively.²⁰ The total availability of $26,000 in debt reduction represents an increase from the $10,000 maximum that was in place prior to the 2004 and 2005 Amendments. In order to qualify for benefits under the Debt Reduction in Repayment Program, a student must have used all 30 months of benefits under the Interest Relief Plan; must be in good standing with the NSLSC and/or her financial institution, with not more than two months in arrears owing on her debt; and her loan payments must exceed a given percentage of her income, as established by the Debt Reduction in Repayment Income Table appended to the Canada Student Financial Assistance Regulations.²¹ If a student has a permanent disability, and is experiencing exceptional financial hardship in repaying her loan due to the disability, she may also qualify for the Permanent Disability Benefit, where all or a portion of her Government Student Loan is forgiven.²²

For provinces that have not reached Canada-Provincial Integrated Student Loan Agreements, there are some variations between the federal debt-relief options and the provincial debt- relief options for repayment of Government Student Loans. For example, under the Alberta Loan Relief Program, enacted on August 1, 2001, students who receive more than $5000 per year in combined Alberta and federal loans may qualify for relief. Financial assistance above $5000 may be provided as a Loan Relief benefit, which is not repayable.²³ In Manitoba, the maximum amount of debt reduction is $6667 compared to $26,000 now available for federal loans.²⁴ In Nova Scotia, students must apply for debt reduction within three months of graduation. The percentage of debt reduction is graduated based on completed year of study and ranges from 15 per cent to 45 per cent. In addition, borrowers may qualify for an Employment Bonus Award or Repayment Bonus Award and receive an additional 25 per cent or 10 per cent, respectively, of the amount of debt reduction they received at graduation.²⁵

Until May 11, 2004, when the 2004 Amendments came into effect, students who filed a proceeding under the BIA were not eligible for new federal Government Student Loans and they could not obtain the benefits of the federal governments' debt relief programs for existing Government Student Loans. A student who files a proceeding under the BIA may now be eligible to obtain Government Student Loans for a maximum of three years, provided he/she remains in the same program of study and continues in full-time status; and he/she may also be eligible for the government's debt relief programs.²⁶

B. Proposals and Reforms

In the last five years a number of proposals have been put forward to increase the number and the value of student loans provided by the federal and provincial governments as well as to amend the current legislation on the treatment of these loans in bankruptcy.

The most recent recommendation to increase the number and the value of government-funded student loans came out of a report commissioned by the Ontario government. In the 2004 Ontario budget the government announced a review of the design and funding of post-secondary education in Ontario. Premier Dalton McGuinty appointed the Honourable Bob Rae as the advisor to the Premier and the Ministry of Training, Colleges and Universities, who with the support of a seven-member advisory panel was asked to advise on two issues: the design of a publicly funded post-secondary system and funding models for this system. The Rae Review was released in February 2005.²⁷ The report, which has attracted significant attention around the country, recommended that the current freeze on tuition fees in place in Ontario should be lifted and that individual institutions should be free to set their own tuition.²⁸ The position of the Rae Review was justified by a condition precedent for tuition fees to be raised: more students should be eligible for government-subsidized financial assistance.²⁹

The status of Government Student Loans in bankruptcy received significant attention in the two recent Canadian government reports on bankruptcy: the Personal Insolvency Task Force Report published in December 2002³⁰ and the Senate Report published in November 2003.³¹ Both reports indicated that reforms were in order to deal with the current exception to the bankruptcy discharge for Government Student Loans, which provides for limited relief on financial hardship grounds, on an all-or-nothing basis, following a costly court application that is only possible 10 years after the bankrupt or former bankrupt has ceased to be a full- or part-time student.³² Both reports referenced empirical data³³ that detailed the dire financial circumstances of bankrupts with student loans relative to those without student loans and demonstrated that such bankrupts where generally not high-income professionals attempting to defraud the system. Further, the reports indicated that the existing legislation was ill-equipped to address intervening life events such as illness, disability, and family breakdown which often accounted for unpaid Government Student Loans and warranted a fresh start. To this end, both reports recommended that the exception to discharge for Government Student Loans should be amended to apply only in situations where it had been less than five years since the bankrupt completed full or part-time studies that the loans had funded. As well, both reports recommended an amendment that would provide courts with the discretion to confirm the discharge of all or a portion of a Government Student Loan before the five-year period has lapsed where the bankrupt could establish that the burden of maintaining the liability for some or all of the debt would result in financial hardship.

In addition to the government reports on bankruptcy, the 10-year exception to discharge has also been met with a great deal of criticism by bankruptcy trustees and student groups. Bankruptcy trustees, who are concerned with the impact the 10-year exception has on their ability to come up with a reasonable solution to debtors' financial distress, have criticized the exception as unduly harsh.³⁴ Student groups supported what was ultimately an unsuccessful legal action to challenge the exception under the equality provisions of the Canadian Charter of Rights and Freedoms.³⁵

In the last year, two bills have been introduced that attempt to vary the timing of the exception to discharge for Government Student Loans. One of these two bills has been defeated. On October 20,³⁶ 2004, Alexa McDonough (Halifax, NDP) introduced Bill C-236,³⁷ which would have amended the BIA to "reduce, from ten to two years after a bankrupt leaves school, the period of time during which an order of discharge does not release the bankrupt from the reimbursement of his or her student loan."³⁸ The bill was subsequently defeated in a motion held on April 13, 2005.³⁹

Most recently, on June 3, 2005, the federal government unveiled a package of long awaited amendments to Canadian bankruptcy legislation in Bill C-55 titled: An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to make consequential amendments to other Acts.⁴⁰ Bill C-55 would reduce the period for the exception to discharge for Government Student Loans from 10 years to seven years following the completion of full or part-time studies.⁴¹ The bill would also reduce the period of time before an application for relief from the exception to discharge could be made from 10 years to five years.⁴² Like Bill C-236 and the government reports recommending a change in the timing of the exception, Bill C-55 does not propose a principled amendment to the substance of the exception. For example, the requirement of making a judicial application for relief following the waiting period in order for any relief from the exception to be granted is left intact.

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1– "You cannot separate a person from his or her knowledge, skills, health or values the way it is possible to move financial and physical assets while the owner stays put." Gary S. Becker, "Human Capital, A Theoretical and Empirical Analysis with Special Reference to Education", National Bureau of Economic Research (University of Chicago Press, Chicago, 1993) at 16. Return to text

2 – Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 178(1) [BIA]. The debts identified in this section include fines imposed by a court; alimony, maintenance or support payments owing; damages awards arising from civil proceedings for bodily harm, sexual assault or wrongful death; debts and liabilities arising out of fraud; and government student loans. Return to text

3 – A "Government Student Loan" is any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students. This includes loans made by private banks participating in government student loan programs. Return to text

4 – BIA, supra note 2, s.178(1)(g). Return to text

5 – Human Resources and Skills Development Canada, "Student Loans Program Annual Report 2002-2003" (2004), online: Student Loans Program Annual Report 2002 – 2003 <http://www.hrsdc.gc.ca/en/hip/cslp/publications/ 12_pu_AnnualReport20022003.pdf> [Note from the Webmaster: This web address is no longer available.] (PDF Format, 580 KB — 59 pages) at 2 [hereinafter Annual Report]. Return to text

6 – Ibid. at 3. Return to text

7 – Ibid. at 20. These are students who are eligible to receive Canada Study Grants (CSGs) from the federal government. Information on the specific per cent of students falling in each category is not provided in the CSLP 2002-3 Annual Report. CSGs are non-repayable and accordingly a detailed discussion of their operation is beyond the scope of this report. Return to text

8 – Quebec, Northwest Territories, and Nunavut have opted out of the federal student loan program and receive alternative payments to operate their own programs. Return to text

9 – Edulinx, online: Canada-Provincial Integrated Student Loans <www.edulinx.ca/> (date accessed: 19 July 2005). Return to text

10 – The government, through the NSLSC, contracts out the administration of the program, including debt-relief options, to two private service providers. Edulinx administers loans issued to students attending not-for-profit universities and colleges and BDP administers loans issued to students enrolled in for-profit training companies. Nelnet, Inc. acquired Edulinx from CIBC for an undisclosed price on November 30, 2004. Edulinx services approximately one million Government Student Loans totalling approximately $7 billion. The company was originally established in 1999. CIBC became the sole owner of Edulinx in January 2002. A significant part of Nelnet's business is the securtization of education finance assets. See www.shareholder.com/Common/Edgar/1258602/930413-05-3765/05-00.pdf (PDF Format). Edulinx sub-contracts with Canada Post to handle the processing of loan documents and the depositing of funds into students' accounts. See Canadian Federation of Students, Membership Advisory, "Latest Changes to the Canada Student Loan Program" (March 2001), online: Membership Advisory <www.cfs-fcee.ca/html/english/research/factsheets/ma-200103-cslp.pdf> [Note from the Webmaster: This web address is no longer available.] (PDF Format, 74 KB — 3 pages) (date accessed: 20 July 2005) at 1 [hereinafter Membership Advisory]. Return to text

11 – Interview of L. Wanczycki, Policy Advisor (27 June 2005) CSLP, Human Resources and Skills Development Canada. This information was not available on the NSLSC website or guide. Return to text

12 – Canada Student Loans Act, R.S.C. 1985, c. S-23, s. 5. Return to text

13 – Ibid., s. 4(2)(b). Return to text

14 – The current federal fixed interest rate is Prime plus 5 per cent, while the floating rate is Prime plus 2.5 per cent. Students have the option to change to a fixed rate at any time. See HRDC Evaluation of the Canada Student Loans Program, 1.0 Introduction, (23 February 1999), online: Human Resources Development Canada <www.hrdc-drhc.gc.ca/> (date accessed: 21 April 2005) at para. 11 [hereinafter HRDC]. . Return to text

15 – S.O.R./2004-120 (effective May 11, 2004) [hereinafter 2004 Amendments]. Return to text

16 – S.O.R./2005-152 (effective August 1, 2005) [hereinafter 2005 Amendments]. Return to text

17 – Canada Student Financial Assistance Act, s.7 and Canada Student Financial Assistance Regulations: S.O.R./95-329, s. 19. See also National Student Loans Service Centre, online: Integrated Interest Relief <http://www.canlearn.ca/> (date accessed: 25 April 2005) [hereinafter Integrated Interest Relief]. Return to text

18 – Canada Student Financial Assistance Act, ibid. and Canada Student Financial Assistance Regulations, ibid., ss. 19 & 20. See also Integrated Interest Relief, ibid. Return to text

19 – National Student Loans Service Centre, online: Revision of Terms <http://www.canlearn.ca/> (date accessed: 25 April 2005). Return to text

20 – Supra note 17, s. 42.1. See also National Student Loans Service Centre, online: Debt Reduction in Repayment <http://www.canlearn.ca/> (date accessed: 25 April 2005). Return to text

21 – Ibid. Return to text

22 – Supra note 17, s. 43.1(1)(b). See also National Student Loans Service Centre, online: Permanent Disability Benefit <http://www.canlearn.ca/eng/after/cant/hpd.shtml> (date accessed: 25 April 2005). Return to text

23 – Edulinx Canada Corporation, online: Repayment Assistance – Provincial and Territorial Loans <http://www.edulinx.com/> (date accessed: 20 July 2005) [hereinafter Edulinx]. Return to text

24 – Ibid. Return to text

25 – Nova Scotia Department of Education – Student Loans (Student Assistance), online: Debt Reduction Program Information <http://studentloans.ednet.ns.ca/content/debt-reduction-program> (date accessed: 20 July 2005). Return to text

26 – 2004 Amendments, supra note 15. See also, Office of the Superintendent of Bankruptcy Canada, "Notice of Changes to the Regulations Under the Canada Student Loan Program" online: Office of the Superintendent of Bankruptcy http://ic.gc.ca/epic/site/bsf-osb.nsf/eng/br01439.html [Note from the Webmaster: This web address is no longer available.] (date accessed: 4 August 2005). Return to text

27 – B. Rae, "Post-secondary Review: Higher Expectations for Higher Learning" (Report & Recommendations submitted to the Premier by the Minister of Training, Colleges and Universities, February 2005) at 23 [Rae Review]. Return to text

28 – See, for example, a sample of the numerous newspaper articles on the topic following the release of the Rae Review: "Rae Review's Funding Flaw" The Toronto Star (21 February 2005) A17; I. Robertson, "Students Fight Fees; Even Rae Comes Under Fire" The Toronto Sun (4 February 2005) 4; B. Whitwham, "Summerlee Doesn't Expect Surprises in Rae Review" The Guelph Mercury (5 February 2005) A1; P. George, "Value of Universities Reflected in Many Ways" The Hamilton Spectator (5 February 2005). See also Ontario, Legislative Assembly, "Excellence Accessibility Responsibility: Report of the Advisory Panel on Future Directions for Post-secondary Education" by D. C. Smith (Chair) (1996), online: Ministry of Education and Ministry of Training, Colleges and Universities <http://www.edu.gov.on.ca/eng/document/reports/futuree.html#sharing> (date accessed: 20 July 2005). Historically, Newfoundland, Nova Scotia, Prince Edward Island, Saskatchewan and Alberta have not regulated tuition fees. New Brunswick and Manitoba occasionally imposed tuition regulations. Prior to the 1990s, Ontario, British Columbia, and Quebec regulated tuition fees. See, Canadian Federation of Students, Fact Sheet 1998 5:5, "Deregulation of Tuition Fees" (November 1998), online: Deregulation of Tuition Fees <http://www.cfs-fcee.ca/html/english/research/fact_sheets.php> [Note from the Webmaster: This web address is no longer available.] (PDF Format) (date accessed: 20 July 2005) at 3-4. Similar to Ontario, British Columbia deregulated tuition fees in 2002. However, in the 2005 Throne Speech, the government announced that they would be re-regulating tuition fees, after fees more than doubled during the period of deregulation. Tuition fees will be capped at the rate of inflation. See, Canadian Federation of Students, Media Release, "Campbell Second-Guesses BC Tuition Fee Policy" (9 February 2005), online: Media <http://www.cfs-fcee.ca/html/english/media/mediapage.php?release_id=162> [Note from the Webmaster: This web address is no longer available.] (date accessed: 20 July 2005). The Ontario example, which is demonstrative of national tuition fee trends and debates, is used to develop the context for the focus of this report on student loans in bankruptcy. The Ontario example is chosen because it recently provoked significant national scrutiny. A detailed review of tuition trends around the country is beyond the scope of this report. Return to text

29 – Rae Review, supra note 27, at 23. Return to text

30 – Office of Superintendent of Bankruptcy Canada, Personal Insolvency Task Force Final Report (August 2002), online: <http://www.ic.gc.ca/epic/site/bsf-osb.nsf/en/h_br01225e.html> [Note from the Webmaster: This web address is no longer available.] (date accessed: 5 August 2005). Return to text

31 – Canada, Standing Senate Committee on Banking, Trade and Commerce, Debtors and Creditors Sharing the Burden: A Review of the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act (Ottawa: 2003), online: Senate of Canada <http://www.parl.gc.ca/37/2/parlbus/commbus/senate/com-e/bank-e/rep-e/bankruptcy-e.pdf> (PDF Format, 1.76 MB — 276 pages) (date accessed: 4 August 2005). Return to text

32 – Where a student returns to school after the 10-year period has commenced, the clock is restarted. Return to text

33 – See S. Schwartz, "The Dark Side of Student Loans: Debt Burden, Default, and Bankruptcy" (1999) 37 Osgoode Hall L.J. 317, for a summary of this data at 329:
"The economic situation of all those declaring bankruptcy suggests that bankruptcy is used primarily as a last resort. The economic situation of those seeking bankruptcy protection with student loans among their debts, or whose student loans were critical in their bankruptcy, is even worse than the already desperate situation of the whole group. To be sure, they are younger and have more education, but they have lower annual household income and lower monthly income at the time of filing for bankruptcy. More than 40 per cent had received income assistance in the two years previous to filing, and about 30 per cent had received unemployment insurance. A surprisingly large portion – more than one-third – had occupations that were unskilled." Return to text

34 – See for example, Hoyes and Michalos, online: Canada and Ontario Student Loans in Bankruptcy <http://www.hoyes.com/student_loan_bankruptcy_Canada.htm> (date accessed: 4 August 2005). Return to text

35 – See Canadian Federation of Students, "Bankruptcy Charter Challenge" (April 2005), online: Campaigns & Lobbying <http://www.cfs-fcee.ca/html/english/campaigns/bankruptcy_charter.php> [Note from the Webmaster: This web address is no longer available.] (date accessed: 26 April 2005). The decision was released on June 30, 2005: Chenier v. Canada (Attorney General), 2005 CanLII 23125 (Ont. Sup. Ct.) (CanLII) [Chenier]. Justice Sedgwick held that the exception was "not based on an individual's "needs, merits or capacities." He was not convinced that the exception does anything more than distinguish between Government Student Loan debtors and other debtors on the grounds of the nature of the debt. Justice Sedgwick described outstanding Government Student Loans as reflecting an economic condition and not a personal characteristic. Return to text

36 – House of Commons Debates, 012 (20 October 2004) at 1525 (Ms. Alexa McDonough). Return to text

37 – Canada Bill C-236, An Act to amend the Bankruptcy and Insolvency Act (student loan), 1^st Sess., 38^th Parl., 2004. Return to text

38 – House of Commons Debates, 065 (25 February 2005) at 1300 (Ms. Alexa McDonough). Return to text

39 – House of Commons Debates, 081 (13 April 2005) at 1525 (Hon. Peter Milliken). Return to text

40 – Canada Bill C-55, An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act and to make consequential amendments to other Acts, 1^st Sess.., 38^th Parl., 2005 (first reading in House of Commons 3 June 2005) [hereinafter Bill C-55]. Return to text

41 – Ibid., cl. 107(2): "Subparagraph 178(1)(g)(ii) of the Act is replaced by the following: (ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student". Return to text

42 – Ibid., cl. 107(3): "Subsection 178(1.1) of the Act is replaced by the following: (1.1) At any time after five years after a bankrupt who has a debt referred to in paragraph 1(g) ceases to be a full- or part-time student, as the case may be, under the applicable Act or enactment, the court, may on application, order that subsection (1) does not apply to the debt if the court is satisfied that (a) the bankrupt has acted in good faith in connection with the bankrupt's liabilities under the debt; and (b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankruptcy will be unable to pay the debt." Return to text

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