Student Loans: The Good, The Bad, and The Ugly

What you need to know before applying for a student loan in Canada

The total amount of student debt in Canada is pretty staggering, estimated to be about $18 million. An average of 1.7 million student borrows across the country, backed mainly by government loans offered by the Federal and Provincial governments. Still, some students prefer private bank loans (about 36% of Canadian students).

Regardless of where you’re getting your money to go to school, the chances are that you will depend on some form of credit or loan to get you through. Unfortunately, this process will be the first time many students just turning the majority in their province become indebted. Therefore, it’s essential to know how student loans work to fully understand what money you’re spending when you have to pay the money back and how much interest you should pay.

Hopefully, this article will help you understand a bit more about student loan life and help you make more informed decisions about how you spend your money.

National Student Loans

The Federal Government of Canada offers a student loan plan for students across the country. It is usually jointly connected with what your province provides yet considered a separate loan on its own. Both can be accessed and managed later from the National Student Loans Service Centre. This website holds a plethora of resources on how to control your money and see an overview of your entire loan and plan payments.

You will possibly apply for both your Federal and Provincial loans together and may pay back both together as well. Each province has its guidelines for interest, payments, etc. So, you will need to do your research on your particular province. However, we will give you a general guide here.

Just because you are receiving your student loan from the government does not necessarily mean it’s the best option – or the cheapest option – for you. However, it is likely the easier option if you or your parents don’t have good credit and cannot get a loan any other way.

Federal Student Loans

Interest Rate: 2.5% + Prime (the average bank Prime rate, which changes frequently). At the time of writing this article (October 2021), the Prime rate in Canada is 2.45%. That means that my student loan’s interest rate is 2.95%. Therefore, if I receive 8,000 as the Federal portion of my student loan, I will be paying $236 in interest when I finish school (although that will increase if I take longer to repay the loan). And that’s only the Federal portion of your overall loan.

Your entire government student loan will not need to begin being repaid until six months after completing your schooling – whether you graduate or stop attending. Interest will not start to be accumulating on your loan until this time, either.

Provincial Student Loans

Each province has its setup for its portion of your overall student loan. For some, you will apply for the Federal amount through your application for the Provincial part.

Yes, some of the above provinces – most notably Manitoba, which already has one of the cheapest tuition costs in Canada – offer 0% interest on the Provincial portion of your student loan.

There are also many grants, bursaries, and special circumstance applications available in most provinces that will help with tuition in other costs. Circumstances include having dependents, being from a low-income family, and more.

How much money will I receive?

How much money you will be eligible to receive or how much money you will get depends on multiple factors. You can typically expect that the loan will be enough to cover the tuition of your college or university. From there, other factors that may increase or decrease your loan include:

  • Whether you require student housing or off-campus housing (if you’re living at home with your parents and not paying rent, then this won’t apply to you).

  • Your parents’ yearly income.

  • Your yearly income.

If you are a mature student, then it will be your annual income that will be evaluated and not your parents’. If you have an RESP or savings, this may lower the amount needed for your loan.

When do I need to use my parents’ income?

If you’re fresh out of high school, you’ll almost certainly need to use your parent’s yearly income to determine your eligibility for a government student loan. You will need to provide their tax return(s) from the previous year.

It isn’t until you’ve been out of high school for six or more years (for the provincial portion) or four or more (for the federal amount) that you are considered a mature student and don’t need your parents’ income to apply. In some cases, this is better because you may be eligible for more money, especially if you have dependents and are paying rent.

Suppose you have extenuating circumstances and are not considered a mature student yet, such as being estranged from your parents. In that case, there are instances where notes can be made on your application to let those evaluating you know about your situation.

Paying back your loan

You’ll start repaying your student loan six months after leaving school. This is also when interest will begin to accumulate. For the Federal portion, there is usually a cap of how much you will need to pay back, such as $7,000, even if your initial loan was for more. On the first of every month, payments are deducted from your account automatically. Many students are surprised to see a large sum of money leave their account after six months, so it’s essential to be ready for it or to apply to defer it ahead of time.

Each province and the National Student Loans Service Centre have repayment plans available, including a deferment plan that temporarily pays your interest if you cannot make payments. You will need to reapply for this deferment every six months.

You can also use the NSLSC to change your payment amount. If you can’t pay as much as they ask, you can apply to have it lowered. The website will automatically show you how your interest payments will change and your overall cost of borrowing as you change your payment amount. It will also change how many payments you will make overall because of how much you are paying. You can also increase the number of your monthly payments if you want to pay them off quicker and save interest in the long run.

Private Bank Loans

There are multiple ways to find credit or loans dedicated to helping with their expenses while at post-secondary school. Sometimes interest rates and payment options may even be better than those offered by the province. It’s worth taking a look at what’s available so you can weigh your pros and cons.

One example is a student line of credit.

Student lines of credit are available from most major banks. To determine eligibility, the bank will need to check your (and your parents if you do not have credit yet) credit score. How much you will receive is also determined by your and your parent’s income. What is good about a line of credit is you only pay interest on the amount of money you use. So, if you have a job as well as a line of credit, you can pay back whatever you use as you attend school, save interest over time, and not be buried in debt after graduation. Banks will also provide a grace period after graduation where you will not be required to begin paying back your loan.

Other benefits include the fact that you will begin building your credit with a line of credit. And student loans from the government are not reported to the credit bureaus. However, this can also negatively affect your credit score if you don’t repay your line of credit on time.

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