Student Debt is Killing Your Credit: A Recovery Guide for Canadians

How Student Debt Affects Your Credit Score

Student debt is one of the most common financial burdens facing young Canadians. The average Canadian graduate leaves school owing between $26,000 and $28,000. That number climbs significantly for those who pursued graduate or professional degrees. When managed well, student loans can actually help build credit. When things go wrong, the damage can follow you for years.

Your student loans affect your credit score in several key ways:

• Payment history (35% of your score): Every payment you make, or miss, is reported to the credit bureaus. Even one payment that is 30 days late can drop your score by 50 to 100 points.
• Debt-to-income ratio: While this ratio is not part of your credit score directly, lenders use it to evaluate your applications. High student debt relative to your income can result in denials for credit cards, car loans, and mortgages.
• Account age: Student loans are often one of your oldest accounts. Keeping them in good standing contributes positively to the average age of your credit history.
• Collections: If you default on federal student loans (typically after nine months of non-payment), the debt is sent to the Canada Revenue Agency for collection. This creates a devastating mark on your credit report.

The Grace Period Trap

After graduation, federal Canada Student Loans give you a six-month grace period before payments begin. However, interest starts accruing on the federal portion immediately after you leave school. Provincial loan terms vary. Many graduates assume they have more time than they actually do, miss the start of their repayment period, and end up with a late payment on their credit report before they even realize it. Mark your repayment start date on your calendar the day you graduate.

Canadian Repayment Assistance Programs

If you are struggling to make payments, Canada has several programs designed to help. Using these programs is far better for your credit than missing payments or defaulting.

Repayment Assistance Plan (RAP)

The federal Repayment Assistance Plan is available to anyone with Canada Student Loans who is having difficulty making payments. Under RAP:

• Your monthly payment is capped at 20 percent of your gross family income.
• If your income is low enough, your required payment may be reduced to zero.
• The government covers the interest on your behalf during this period.
• You must reapply every six months and provide proof of income.
• Payments made under RAP are considered on-time and will not hurt your credit.

Apply through the National Student Loans Service Centre (NSLSC) as soon as you realize you cannot make your full payments. Do not wait until you have already missed one.

Provincial Assistance Programs

Most provinces offer their own repayment assistance for provincial student loans. Ontario has OSAP RAP, British Columbia has the BC RAP, and other provinces have similar programs. Check with your provincial student aid office for specific details.

Interest Relief and Loan Forgiveness

In certain situations, you may qualify for loan forgiveness. For example, the Canada Student Financial Assistance Program has provisions to forgive remaining debt for borrowers who have been in repayment assistance for an extended period (typically 15 years). Some provinces also offer loan forgiveness for graduates who work in underserved communities or specific professions like nursing or teaching in rural areas.

Building Credit Alongside Student Debt

Having student debt does not prevent you from building a strong credit score. In fact, the combination of a student loan and other credit products can help your score by improving your credit mix. The key is managing everything carefully.

Start Monitoring Your Credit

Sign up for free credit monitoring through Borrowell. This gives you weekly access to your Equifax credit score and report. Knowing your starting point is essential, and catching errors early can save you months of frustration.

Get a Secured Credit Card

If your credit has already been damaged by missed student loan payments, a secured credit card is your best rebuilding tool. The Capital One Secured Mastercard requires a small refundable deposit and reports to both major credit bureaus. Use it for one or two small purchases each month and pay the full balance by the due date.

Report Your Rent Payments

If you are renting (and most graduates are), use a service like Chexy to have your rent payments reported to the credit bureaus. Since you are already making this payment every month, you might as well get credit-building benefit from it.

Automate Your Student Loan Payments

Set up automatic payments for at least the minimum amount on your student loans. This is the single most important thing you can do to protect your credit. Even if you can only afford the minimum, an on-time minimum payment is infinitely better than a missed one.

Long-Term Recovery Strategy

Prioritize High-Interest Debt

If you have credit card debt alongside your student loans, focus on paying off the credit card first. Credit card interest rates in Canada typically range from 19.99 to 22.99 percent, while federal student loan interest is prime plus zero (currently about 5 percent). Pay the minimum on student loans while aggressively paying down higher-interest debt.

Consider Consolidation Carefully

Consolidating your student loans into a personal loan or line of credit can sometimes lower your interest rate, but it also removes your eligibility for government repayment assistance programs like RAP. Weigh the pros and cons carefully before giving up those protections.

Build an Emergency Fund

This may seem counterintuitive when you are in debt, but having even $1,000 in savings can prevent you from missing a loan payment when an unexpected expense comes up. A single missed payment can erase months of credit-building progress.

Set Milestone Goals

Recovery is easier when you break it into achievable targets:

• Month 1-3: Enroll in RAP if needed, set up auto-payments, get a secured credit card, and sign up for credit monitoring through Borrowell.
• Month 4-6: Maintain perfect payment history on all accounts. Start reporting rent payments.
• Month 7-12: Watch your score improve. Consider a second credit product if your score has risen above 600.
• Year 2: Aim for a score above 680. Explore whether refinancing your student debt at a lower rate makes sense.

When to Seek Professional Help

If your student debt feels unmanageable, a non-profit credit counsellor accredited by Credit Counselling Canada can review your situation for free. They can help you create a debt management plan, negotiate with creditors, and explore all your options before you consider more drastic measures like a consumer proposal.

Remember that student debt is not a moral failing. It is a systemic issue that affects hundreds of thousands of Canadians. The programs and tools above exist specifically to help you get through it without permanent damage to your financial future.