It’s pitched as an investment in your future — debt you take on now that will result in opportunities down the road, including higher earnings.
I’m talking, of course, about student loans.
This infographic from the Canadian Alliance of Student Associations provides a snapshot of post-secondary education in Canada. Of note: 489,000 students have federal student loans, together worth more than $2.7 billion.
And in 2014-2015, at least 256,000 borrowers were struggling to pay back those loans.
I wish I could say these statistics surprise me, but they don’t. For better or worse, student loans are a fact of life for many in 2019. Whether your’e considering a loan to pay for post-secondary education or you’re in the process of repayment, there are a few things you should know about how these loans work.
My Canada Student Loans experience
My experience with Canada student loans has been secondhand through Jeff.
I didn’t take out a student loan. Instead, my degree was paid through a scholarship (tuition) and an educational line of credit (one year in residence). After moving out of residence, I lived with roommates and worked part-time to pay my bills. Through working and living frugal, I paid off my credit line the day before I graduated in 2011.
As a result, I didn’t know anything about student loans until it was time to start paying back Jeff’s. While I still wouldn’t call myself an expert, I have learned a few things during this repayment stage.
What is the Canada Student Loans program?
The Canada Student Loans program is a federally-funded program designed to help students pay for post-secondary education.
Through this program, the federal government offers financial assistance to students in the form of grants and loans. The amount you are eligible to receive depends on many factors, including which province you’re from. Although there are many non-repayable grants available to students through this program, the loan portion must be paid back.
Student loans in Canada are generally made up of two parts: a federal and provincial portion. This post is focused on the federal loans. Administration of provincial student loans vary with some provinces offering an integrated approach, while others require two separate payments.
The federal portion of a student loan is managed through the National Student Loan Service Centre.
4 things you need to know about your Canada student loan
If you have a loan through the Canada Student Loan program, there are a few things you need to know.
Your interest rate
Just like any other loan, Canada student loans collect interest.
Applicants can choose between a fixed or floating interest rate. As of September 2019, the fixed rate is prime plus five per cent. The floating interest rate is prime plus 2.5 per cent.
These rates are expected to change in November 2019. When that happens, the variable rate will be reduced to prime, with the fixed rate reduced to prime plus two per cent. Again, this is in relation to the federal portion of the loan; interest on provincial portions vary depending on which province you’re from, with some province’s offering interest-free provincial loans.
One cool thing about the National Student Loan Service Centre website is it shows both the interest rate and how much you pay per day. For example, in September 2019, our floating interest rate was 6.45 per cent and our daily interest charge was $6.06.
Your repayment terms
The Canada Student Loans program offers a six-month grace period for new graduates. During this time, you are not expected to make any payments on your federal loans.
Rules about interest during the grace period are expected to change in November 2019. When this happens, these loans (and Canada Apprentice Loans) will no longer accumulate interest during the grace period. Again, this is about federal loans; rules for the provincial portion differ from province to province.
Once your grace period is over, it is expected that you will begin making payments on your student loan.
Which brings me to…
Your minimum payment
Payments for a Canada Student Loan are initially calculated based on an average 9.5 year pay-off timeline.
Your minimum payment for your student loan will cover your monthly interest and some of the principal. The size of your minimum payment will vary depending on how much you owe.
While I hate seeing any of the money put toward our student loan used for monthly interest charges, there is one positive in this: you can claim interest paid on a student loan on your income tax! This is the only part of your student loan payment you can claim on your taxes.
Federal (and integrated) student loans are paid through the National Student Loan Services Centre.
Your options if you can’t make your minimum payment
If you can’t make your minimum payment, Canada Student Loans offers a couple different options
If you’re eligible for the Repayment Assistance Program, you may not be required to make payments that exceed your income by 20 per cent — or any payment at all.
You can apply for RAP as soon as you start to repay your student loans. If you are eligible and accepted into RAP, the Government of Canada and your provincial or territorial government will pay the interest owing that your revised payment does not cover. After 60 months of RAP or 10 years after you finish school, whichever comes first, the governments will begin to cover both the principal and interest that exceeds your reduced monthly payments.
As long as you remain eligible for RAP the balance of your loan is gradually paid off and repayment obligations will not exceed 15 years (or 10 years for persons with permanent disabilities) after leaving school.
You can apply for this program anytime during repayment but you do have to remember to re-apply every six months.
Jeff and I used this program during the first couple years of repayment on his student loan. It helped a lot. At the most, our minimum payments were about $100 — and there were a few times where we didn’t have to pay anything. We stayed in this program until our income reached a level where we were no longer considered eligible.
Revision of terms
Canada student loans are designed to be paid back in 114 months (9.5 years) but you can increase that up to 174 months (14.5 years).
The benefit to doing this is that it decreases the monthly payment. The downside? By taking longer to pay back your loan, you’ll pay more interest.
After we became ineligible for repayment assistance, we went ahead and did a revision of terms. Another thing we did: we requested to make interest-only payments. This is an option that’s available for a maximum of 12 months on the lifetime of a loan. Doing this made it possible for us to focus on paying back all our non-student loan debt before working on the student loan.
Both these programs are excellent options if you find you’re unable to make the minimum payment right away.
Should you use Canada Student Loans to pay for post-secondary education?
Honestly…it depends. That’s a total cop-out of an answer, I know, but that’s how I feel about it.
On the one hand, I appreciate the way this program increases accessibility of post-secondary education for so many people.
There are many people who can’t afford to go to university or college without a student loan. Post-secondary education is expensive (too expensive, some might argue) but it can open doors.
That said, I don’t think “take out a student loan” should be the default for paying for school. There are other options available and I do think there is value in exploring those before committing to student loans.
Additionally, I think we need more education about student loans and how they work.
Taking on a student loan is a big decision and unless something has changed since I was in high school (which is possible), there is not a lot of time spent on making sure students truly understand the financial implications.
The Canada Student Loan program has helped make post-secondary education accessible for many Canadians. That said, if you have a student loan or if you’re planning to use one to pay for your studies, take some time to learn about your loan. Knowing the details of how your loan works can help you pay it off.
Did you use a student loan to pay for post-secondary education?