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Art Eggleton

The Hon. Art  Eggleton, P.C. Senator Art Eggleton has served the people of Canada and the city of Toronto in public office for over 35 years. He was appointed to the Senate on March 24, 2005, by the Rt Honourable Paul Martin and represents the province of Ontario.

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Bankruptcy and Insolvency Act—Second Reading

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Statement made on 31 May 2007 by Senator Yoine Goldstein (retired)

Hon. Yoine Goldstein:

Honourable senators, Bill S-227 is a bill intended to provide needed relief to young Canadians who have borrowed money to pay for their education and find themselves unable to repay their loans.

As a key to this debate, in which I hope many of you will actively participate, I want to explore with you, first, the Canadian student loans programs; second, the Bankruptcy and Insolvency Act provisions relating to student loans; and third, the thrust and intent of the proposed amendment.

To do this, I am borrowing and drawing liberally — and I hope that the term does not offend honourable senators on this side of the chamber — from excellent research by Professor Stephanie Ben-Ishai of the Osgoode Hall Law School, an excellent if brief description of the Canada Student Loans Program by Tim Riordan Raaflaub of the Parliamentary Information and Research Service and a paper by Constantine Capsalis on the factors affecting the repayment of student loans.

Let me start with the student loans program itself. In 1964 the Government of Canada established the Canada Student Loans Program to help young Canadians finance the costs of their post-secondary education. This program is available today — with amendments I will talk about in a few moments — in all provinces and territories except for Quebec, the Northwest Territories and Nunavut, each of which have their own programs and receive independent funding from the federal government to offer their own student assistance programs.

The Canada Student Loans Program provides loans to full- and part-time students at the post-secondary level. "Post-secondary" is defined as including colleges, universities and private institutions offering, predominantly, trade education.

Students are generally eligible for these loans provided that their income and that of their parents, in accordance with a particular formula, does not exceed a certain threshold each year.

The program was designed to supplement the resources of individuals and their families by providing loans to students who could demonstrate need. The interest rate was set by the Canadian government, which paid the loan interest to the lending institutions, usually banks, during the period of student enrolment and for a period of six months thereafter. The borrowers were given up to nine and a half years to repay their loans.

Certain statutory changes were made in 1981 and again in 1983. Loans for part-time students were introduced, and an interest-relief program was established so that low-income borrowers who, after graduation, remained unemployed or were sick or disabled could apply to have the federal government pay the interest on their loans for up to an additional 18 months.

With the increasing cost of education, the program was completely restructured in 1994 with the passage of the Canada Student Financial Assistance Act. The way in which financial need was assessed was changed, and a number of other changes were made to allow students to receive large loans. A program was introduced to essentially assist students with permanent disabilities.

From 1994 onwards, borrowers were expected to enrol in a program leading to a degree, a diploma or a certificate and were required to make what the statute called "satisfactory progress" each year.

In 1995, the Government of Canada stopped guaranteeing new loans. This meant that the lending financial institutions would now assume the risk when the borrowers defaulted, but the government paid them a risk fee or a risk premium equal to 5 per cent of the value of the loan, which they consolidated each year upon the graduation of the student.

In 1997, the program was further amended to allow for interest relief for as much as 30 months, up from the 18 months envisaged in 1983. At the same time, it became possible to extend the loan repayment period from nine and a half years to 15 years and extend interest relief to a maximum of 54 months. In addition, a new Debt Reduction and Repayment measure provided that up to $10,000 of the capital of the student loan could be forgiven once interest relief had been exhausted. Canada Study Grants for students with dependants also became available at that time.

In 2000, financial institutions generally withdrew from the plan, and the federal government accordingly introduced directly financed loans. Two separate organizations now handle loans made to students.

In 2003, the plan was again changed to allow protected persons, including special convention refugees, to apply for those grants.

The 2004 budget had the effect of reducing parental contributions expected from middle-income families, and a new grant of up to $3,000 was made available to first-year students from low-income families to assist with tuition costs. Income thresholds for interest relief rose by 5 per cent, and the Debt Reduction and Repayment measure was amended to allow borrowers to have up to $26,000 of their loan forgiven.

The 2006 budget provided that loan eligibility for students from families with incomes between $65,000 and $140,000 per year would be expanded and in August 2007, reduced parental contributions are expected to enhance loan assistance for some 25,000 individuals.

The program, honourable senators, has achieved remarkable penetration. In the education year 2003-04, over 340,000 full-time students received a student loan, and the average loan obtained by these borrowers was over $4,800 per year.

The program is one of Canada's great success stories, and we should be justly proud of a system that permits students from low- and middle-income families to complete their education by obtaining interest-assisted loans reimbursable over a very long period of time.

The obvious intention is that enhanced earnings resulting from enhanced education would be used to reimburse these loans, and it generally works well.

Since almost a decade and sometimes more is allowed for reimbursement for loans following their consolidation on the graduation of the student, it is interesting to look at statistics with respect to students who graduated in 1994-95, some 10 years later, because they have had almost a decade to reimburse. About 128,000 students consolidated their student debts that year. Nine years after consolidation, 39 per cent of the students had repaid their loans in full, 30 per cent were still making payments but were in good standing, and 31 per cent were in default. Default, however, is not defined as a permanent loss but rather as being in arrears for three months or longer. The statistic with respect to supposed defaulted loans, although it stands at 31 per cent, is factually considered to be lower.

It is encouraging to note that two years after graduation, fully 20 per cent of graduates with student debt had paid off their loan completely. For those with debts still remaining two years after graduation, about a quarter of the debt had been paid off, more than would be paid off by a graduate making regular payments with the standard 10-year repayment cycle.

Some former students, however, are unable to repay their loans. This inability can arise from a number of factors. One important reason is the fact that trade schools are included in the definition of post-secondary education, and some students borrow to complete trade schools and find themselves unable to find a job in the trade for which they were trained. Other students are unable to find jobs for other reasons. Still others drop out and never complete their studies and therefore are unable to find employment in their chosen field. Some become sick. Some suffer other personal problems or issues which preclude their ability to pay.

Whatever the reasons may be, two clear facts emerge from the research and the literature. First, debt size is a factor in non-repayment only for very large student debt, and, second, the type of study the student engages in is less important than the student's future income.

One further thing is clear, and this is essential for an understanding of the philosophy behind this proposed bill: There is absolutely no evidence at all that students have been abusing the bankruptcy process to rid themselves of student debt.

However, looking at bankruptcy legislation in connection with student loans, one would think that abuse has occurred. This is not the case. The research is clear and consistent: abuse of the bankruptcy process is not a factor in the non-reimbursement of student loans.

In order to deal intelligently with the provisions of the Bankruptcy and Insolvency Act relating to student loans, we should first take another look at the discharge process.

The general philosophy of the Bankruptcy and Insolvency Act in so far as consumer debtors are concerned is that the unfortunate debtor who is in good faith but cannot meet his or her financial obligations should be relieved of those obligations so that the debtor may make a fresh start and integrate himself or herself in the economy of the society in which the debtor lives, free from the crushing burden of their indebtedness so that they may once again participate in the economic and social life of the society in which they live as free actors. The Bankruptcy and Insolvency Act provides, with very rare exceptions, that where a person goes into bankruptcy, he or she is liberated from his or her debts automatically nine months after going into bankruptcy.

Those that abuse the process, and there are some, and go into bankruptcy a second time are subject to a different regime, and those who have sufficient excess income to pay some portion of their debts are obliged to do so.

However, even first-time bankrupts are not liberated from all of their debts. For instance, they are obviously not liberated from the obligation to pay alimony or family maintenance. They are not liberated from a debt that was incurred as a result of misrepresentation or fraud. They are not liberated from the obligation to pay fines, if fines have been assessed.

In 1997, an amendment to the bankruptcy legislation was introduced to preclude discharge of student debts if the bankruptcy had occurred within two years of the bankrupt leaving school. That meant that a person who had left school with student loans was unable to obtain relief from those loans until at least two years had passed since the time that the student had terminated his or her studies. By an amendment introduced in 1998, this two-year exception to discharge was increased to 10 years, making it virtually impossible for students to obtain a discharge of their student loans.

This provision did not prevent the banks from abandoning the program in 2000, less than two years after this amendment came into force.

There is no evidence that this draconian provision did anything to enhance the collectability of student loans. Certainly, it granted no relief to former students who were unable to find jobs or to earn a sufficient amount of money to discharge their student loans.

The Personal Insolvency Task Force, which I had the honour to chair, and which issued its report in 2002, and the Standing Senate Committee on Banking, Trade and Commerce, which issued its report in 2003, both recommended that the exception to discharge for government student loans should be amended and not be dischargeable in situations where it had been less than five years since the bankrupts completed full- or part-time studies. 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 had elapsed where the bankrupt could establish that the burden of maintaining the liability for some or all of the debt would result in financial hardship.

Bill C-55, which we all remember, was passed in this chamber shortly before the fall of the Liberal government. Notwithstanding its terrible flaws, it 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. The bill would also reduce the period of time before an application for relief from the exception to discharge could be made to the courts from 10 years to five years.

Professor Ben-Ishai suggests, in her study, that student loans should be treated like any other debt, and should be subject to discharge like any other debt. She suggests that if there is abuse, our courts are well able to deal with such abuse and provide, as a condition of discharge, that the debtor must pay all or a portion of his or her student loans.

The present legislation proposed by Bill C-55 leads to inhuman results. Senators Angus, Biron, Hervieux-Payette, Moore, Oliver and Tkachuk — and I believe Senator Meighen was part of the committee at that point, as well — will recall with me the gripping and depressing story told to us in 2003 by a young single mother from the Maritimes who had left medical school after her third year, had not completed her studies and was saddled with tremendous debt which she could not repay. We were also told the story of a suicide in the Maritimes by someone who could not pay her student loan because of the draconian provision providing for a 10-year delay.

The legislation, in this case, forced this young woman to remain in a condition of inability to pay, coupled with inability to escape — sort of permanently enslaved to debt. She and her child were victims, and their victimization really victimized society because she could not reintegrate herself, because of the Bankruptcy and Insolvency Act provisions, as a useful member of society.

Honourable senators, this bill does not propose to do away with some special status for student loans in the event of bankruptcy. There is something that is difficult to accept in having all society pick up the liability for student loans where the student has gone bankrupt while the student benefits from the education which has been paid for by the loan — and, therefore, by society.

Accordingly, this bill proposes that the liability for a student loan will not be discharged if the student goes into bankruptcy within the two years next following the termination of his or her studies. This two-year period permits the student to take stock of his or her situation, seek and obtain employment and make a serious and honest effort to repay the loans.

The two-year suspension was chosen with care. The statistics are that fully one third of student loans are reimbursed within the two years next following the graduation of the student. However, there may be some situations where it is apparent that the student simply cannot repay, even after the two years.

Accordingly, this bill envisages the possibility of the student seeking an order from the court, even within the two-year period, that the debt is discharged. The court, however, with respect to that application, according to the bill, may refuse the application, leaving the debt intact or may grant the application, relieving the student of the debt. The court may also order a partial reimbursement of the debt or other appropriate conditions, having regard to circumstances. In all of these cases, where the student is seeking relief, the burden will be on the student to establish hardship in reimbursing the loan.

Honourable senators, this proposed amendment is a humane, sensitive and decent compromise between the need for students, like all citizens, to honour their obligations on the one hand, and the need for society to grant relief to those in society who cannot cope with the requirement to fully repay the student loans.

Bill S-227 is non-partisan. It is neither Liberal nor Conservative; it is Canadian. I respectfully commend it to honourable senators for earnest consideration.

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