Coping with student loans
By Jim Middlemiss • Bankrate.com

If you're feeling the pinch paying back all that money you borrowed from the Canada Student Loans Program to finance your education, you'd better beware. Now more than ever before it's important not to default on them and let them go into arrears because the Canada Revenue Agency (CRA) is now in charge of collections.

Ottawa insolvency lawyer Stanley Kershman, of Perley-Robertson, Hill & McDougall LLP, explains the "CRA is a far more sophisticated collector" than the private collections agencies that were used in the past. "They have a great success rate in terms of collecting money."

Rob MacKnight, a tax lawyer with Wilson Vukelich LLP in Markham, Ont., says the CRA is "surprisingly unsympathetic in their debt-collection strategies. They often don't realize just how much power they wield. They're like a dog with a bone -- if someone owes them money, they're going to get their money."

That's bad news for students who borrow money and can't repay. According to Statistics Canada, a student who acquires a Bachelor's degree typically owes $19,500 in government student loans, compared to someone acquiring a college degree who owes an average of $12,600. About 14 percent of students with a Bachelor's degree owe $25,000 or more.

About 24 per cent of students with a Bachelor's degree report having trouble paying back their loans; that rises to 38 per cent for those with large debts. For college grads, 30 per cent say they have problems repaying the money they owe.

Kershman says the biggest weapon CRA has in its arsenal to go after students who don't pay back their loans is a lawsuit. If it gets a judgment, it can garnishee your wages or demand payment from a third party who owes you money.

MacKnight adds that it's "not a good sign to employers if they receive a garnishee notice from CRA. It's not the kind of thing you want hanging around in your personnel file. It's embarrassing for your employer to have to deal with it on your behalf."

However, there is hope for students feeling weighed down by their loans. Lawyers say that by being proactive and acting before you default on your loans, you can reduce the damage. Says MacKnight: "If you go to them with a proposal that appears to be realistic, they're generally not too bad. You can work out something. As long as you honour the arrangement, you're OK. If you don't honour the arrangement, then you frequently don't get a second chance. If you do, it's on much worse terms and you won't get a third chance."

Kershman, author of "Put Your Debt on A Diet," has five tips for dealing with problem student loans:

Tips for dealing with problem student loans:

• Seek interest relief Take advantage of interest relief, which allows graduates to forgo paying their loans for a specific period of time. The government will pay your interest and the length of the loan is extended. Kershman says the number of students seeking such relief tripled between 1994 and 2002. Even though about 35 per cent of borrowers are eligible for such relief, he says fewer than half of those take advantage of it. • Be professional When dealing with loan officials, be courteous and negotiate a repayment schedule. If that isn't working, ask to speak to the official's supervisor. • Get it in writing Kershman says when you do arrive at an agreement, get it in writing. That includes the name of the person you are dealing with and the date and time. Ask for a confirmation letter. • Live up to the deal Make sure the deal is one you can live with. If it looks like there will be problems meeting your commitment, contact the student loan program officer immediately and try to negotiate a new deal. • Seek professional help There are a number of nonprofit debt counsellors who can help you develop a budget and identify cost savings. They will even help you deal with creditors, so don't be afraid to seek help.

Of course, you can always nip the problem in the bud earlier. If you're in school now, take the time to understand the real cost of your education. It's more than simply tuition and books -- it includes living expenses, transportation and equipment such as computers. Once you know how much school will cost, you can develop a realistic budget to help you manage your money effectively and keep your borrowing to a minimum.

That way, you will reduce the likelihood of borrowing too much and getting yourself in trouble with CRA officials in the future.

Jim Middlemiss is editor of Canadian Lawyer magazine and is based in Toronto. He's a frequent contributor to the National Post and Investment Executive.