Everything you need to know about the rising debt among young medical students

For young professionals fresh out of medical school, the high cost of living and significant educational debt adds financial stress at the beginning of their career. But there are solutions.

For some time now, Canadians have been struggling to make ends meet as the high cost of living persists across the country. 

Add to that the costs associated with completing medical school and entering a residency, and medical students are entering their careers with significant and sometimes overwhelming debt.

For students that have found themselves in these difficult financial situations and may feel stuck, options exist that can help you reduce or eliminate student debt and get back on track.

Trends in student debt among medical professionals

An undergraduate degree, four years of medical school and another three to four years of residency is often a massive financial undertaking for individuals.

Student debt accumulates fast, and studies show the average medical school debt in Canada is $90,000 with over 30 percent of students reporting $120,000 of debt or more. Not factoring in any premedical undergraduate school debt, these figures show just how heavy the burden of debt can be on young medical school grads.

Even when earning $300,000 post-residency, many will take well over a decade to pay off their loans. Critical and difficult decision making is key to preventing you from going further into debt.

Private loans vs government loans

Depending on household income, scholarships, grants, and government student aid is available to all undergraduate students across Canada.

But when a student enters medical school, the cost frequently exceeds the maximum allowances of those three main funding sources for post-secondary studies, making private loans the next best option.

Unlike government issued student loans, private loans issued through banks or lenders have different rules when it comes to repayment and what happens if the applicant becomes insolvent.

• Government loans – Government issued student loans are interest free while you’re in school full time and you won’t be forced to make any payments on the balance until you’ve graduated. There’s a long repayment period, typically 10 years, to fully repay your loans after graduation.
• Lines of credit (unsecured) – Interest on lines of credit will start to accumulate immediately. You can either pay monthly interest on the loan or you can capitalize the interest by adding it to the principal. This can help with immediate cash flow, but it increases the overall size of the debt. For lines of credit with large principal amounts, the interest will be hundreds of dollars a month.

Let’s explore the options available if insolvency is the next step.

Bankruptcy vs proposals

First and foremost, reaching out to a Licensed Insolvency Trustee (LIT) will help you get a better sense of where your debt is at and what options are available to you.

There are two main options to consider: Proposal and Bankruptcy.

Proposal

A proposal is essentially a negotiation with creditors. As a debtor, you get to decide what you want that to look like. The offer to creditors can be a lump sum offer or payments over a longer period of time.

Consumer Proposal - This type of proposal involves a negotiation with your creditors. Your debt must be less than $250,000 to qualify and the proposal cannot exceed a five-year term. Consumer Proposal approval is dependent on your creditors voting, over a 45-day period, and you need 50 percent of voting dollars to vote in favour for it to be approved.

Division 1 Proposal – A Division 1 Proposal is for those with debt exceeding $250,000 and for those that need more than five years for repayment. Like Consumer Proposal, the application goes to your creditors, but the voting period is only 21 days, and riskier. You need a majority in number of votes and two-thirds of the value of the voting debt to be approved. If the creditors vote against, the two-thirds value threshold isn’t reached, or the creditors don’t respond before the voting period expires, the debtor is automatically bankrupt.

For both proposal options, once filed, you stop making payments on unsecured debts such as credit cards, unsecured loans and lines of credit, unpaid utility bills, etc., and wage garnishing will stop.

If a proposal is approved, the creditors are bound by it. You can retain your secured assets if you wish, as long as you make the payments to the secured creditors.

Bankruptcy

There are two types of Bankruptcy – summary and ordinary – but think of them as a small option and a big option. The only real difference is that with ordinary Bankruptcy, a LIT is required to put a notice of Bankruptcy in the newspaper.

Generally, in a Bankruptcy, everything that a person owns becomes property of an estate. The estate is just the pot of money/assets to be distributed to repay debts. Debtors are required to report income and any changes in assets during the Bankruptcy and payments can fluctuate as a result of changes in income. Any windfalls received during the Bankruptcy will also fall into the estate.

But every situation is different and it’s hard to predict what Bankruptcy is going to look like until you’re at the end of it.

All government issued student loans where the student has not been out of school for a period of seven years will have the debt survive in an insolvency filing, in most cases. If a student has been out of school for a period of at least seven years, then the debt will be discharged. If they have not, the debt will survive an insolvency filing. There is an option to make a court application after five years, but the LIT generally isn’t involved in that process. Counsel would need to be retained to help the debtor with this process.

Getting debt under control

If insolvency isn’t the right answer for you, there are tools, tips, and tricks to prevent you from having to file. Developing or honing good financial habits will pay off when budgeting, setting future goals, creating a savings, and considering repayment of existing or future debts.

If filing for a Proposal or Bankruptcy is the best option for you, budgeting after filing then making a plan to rebuild your credit is key. Meeting with a LIT, planning for the future, and taking steps to help get out of debt and reach your goals can eliminate financial stress and give you the space to start your career off on the right foot.

If insolvency isn’t the answer for you but you want to get ahead of your growing debt, consider making a budget, pay off your biggest debts first while maintaining minimum payments on the rest, and make a plan for the future with your long-term financial goals in mind.

If you have filed, your LIT will help you rebuild your credit and maintain your financial freedom for years to come, decreasing your debt burden and setting you up for success.