Financial-skills training can keep student loan defaults away

One of the sad things Connie Gibbs sometimes sees are young people defaulting on their student loans.

As a financial-aid adviser at BCIT, she knows that nonpayment can lead to serious consequences. Credit ratings are destroyed; loans go into collection; and if a borrower goes back to school, it’s difficult to get additional financial aid.

“It’s a big mess,” Gibbs told the Georgia Straight in a phone interview.

According to her, a lot of these problems could be partly avoided if financial-skills training is a requirement for credit under the Canada Student Loans Program (CSLP).

She recalled making this suggestion to the Task Force on Financial Literacy. That body, appointed by the federal government a few years ago, was tasked to make recommendations to the minister of finance on how to improve the skills of Canadians in managing their economic affairs.

“It’s irresponsible to loan money to people who are young, who have no experience of debt, and have no education how to manage debt,” Gibbs said.

The task force recognized the importance of financial training for students. “Taking out a loan for post-secondary education is among the earliest major financial decisions made by youth in Canada,” it stated in its 2010 report. “The amounts being borrowed are by no means ‘pocket change’: an estimated 4.3 million students have received almost $32 billion in loans since the CSLP was created in 1964.”

It proposed that the national government work together with provinces and territories to institute mandatory financial literacy for students who have qualified for loans.

Gibbs said that as far as she knows, the federal government has done nothing about this recommendation.

Unpaid student loans are, ultimately, borne by taxpayers. According to supplementary-spending estimates tabled by the Treasury Board before the House of Commons earlier this year, the government was writing off $231 million in uncollected debts for the fiscal year ending March 31, 2013.

That amount covers 44,048 loans. “Amounts being written off are debts for which all reasonable efforts to collect the amounts owed have been exhausted,” states the board’s request for spending authority.

Employment and Social Development Canada, previously known as Human Resources and Skills Development Canada, administers the student-loan program. The ministry noted in an annual report that most defaults occur within three years of entering repayment. It also pointed out that the vast majority of students repay their loans fully and that default rates are declining.

Defaults fell to 13 percent in 2009-2010 compared to 28 percent in 2003-2004, according to the ministry.

In addition to mandatory financial literacy, Gibbs said that the government can also do a better job making students aware of available measures that can help them.

“It’s marketed rather passively by the government,” Gibbs said. “So it’s not like people are being given timely information, and when they do get it, it’s buried in a lot of fine print.”

One of these is the Repayment Assistance Plan. This allows borrowers to make affordable payments based on gross family income and size. Payments do not exceed 20 percent of gross family income.

“If they are approved to be on this program, their loans are in good standing, their credit rating is protected, and their loan isn’t getting any bigger,” Gibbs said.

Another option is the federal part-time-student loan program. It covers tuition, books, supplies, transportation, and childcare. Part-time students can also explore grant opportunities. According to Gibbs, one can end up with less debt by studying part-time.

Former BCIT student Nimfa Hernandez sought Gibbs’s advice when she took up a human-resource-management program. The mother of three got a part-time-student loan and grants. She now works as an employment-services specialist at another postsecondary institution.

“If a student is having second thoughts about going back to school because of age or they think that they don’t have the financial resources and all that, there is help out there,” Hernandez told the Straight in a phone interview.

Gibbs is currently helping one woman to rehabilitate her credit standing so she can get a new loan and study at BCIT. The person had defaulted on a loan she received at another school because of a medical problem. The accrued interest is now more than $10,000.

Gibbs also said that BCIT recently began financial-literacy workshops, starting with nursing students.