Understanding Canadian Student Loans and How to Properly Manage Student Debt

Every year people search for student loans in Canada to make their dream of higher education a reality. Student loans are largely used in Canada, with an average debt of $30,600. Student loans can be very confusing since it’s often difficult to find correct information. Here’s what you need to know.

The impact of student debts

The different levels of government in Canada have some loan programs. Apart from going this conventional route, students can opt for a student loan or line of credit from financial institutions or private lenders. However, this option can be riskier considering that these loans are stricter in repayment terms and do not offer the same kind of leeway that government-backed loans do.

Additionally, student loan repayment starts right after graduation. The loan restricts them from becoming genuinely financially independent and achieving their personal goals. Graduates get so caught up in making loan payments that their dreams of buying a new house or starting a business venture go on the back burner.

Types of student loans

Most people are under the impression that only government student loans are an option. However, there are several loan options to choose from. No matter how you choose to finance your education, each option comes with unique interest rates, conditions, and repayment methods.

If you decide to go for a government-funded student loan to pay for your education, you must apply well in advance of your academic year. Depending on the province you live in, you can check the application deadlines on their websites. 

In case you are not eligible, finding out sooner can help you plan out an alternative without it becoming an emergency. So, it pays to apply early. You need the following information and documentation:

• 1. Your name, date of birth, address, and SIN number
• 2. Your income, your parent’s income, and your partner’s income (if applicable)
• 3. Information on any cash, RRSP savings, or RESP savings you may have
• 4. Details on the chosen program and institution you plan on attending. (You are required to state whether you are going full-time or part-time as this slightly changes the terms).

Most lenders offer an online application.

Federal government student loan

You coudl choose the federal student loan route. These loans and grants are available everywhere except Quebec, Nunavut and the Northwest Territories. In fact, this program works with the provinces, so you may not need to submit multiple applications. The application form will ask you several questions about your family situation, your financial situation and your studies. Depending on your situation, the amount offered may include a grant component, which you’ll never need to repay. What’s more, as of April 1, 2023, the federal government no longer charges interest on student loans!

Provincial student loans

Individual provinces offer their own student loan programs, too. Each of these loans has a different interest rate depending on which province is funding it. The following table explains the interest rate and some special features under each province.

Bank student loans

Banks offer loans for all sorts of needs, from mortgages to car loans. Similarly, you can opt for a student loan from a bank to pay for your college or university tuition costs. Furthermore, banks can give you loans that need to be paid back every month over a specific period. Since it is paid back in monthly installments, it is advised only to borrow the amount you need to keep your payments manageable. 

Student lines of credit

You can also take up an extra loan if the funds provided through government means are not enough to cover your tuition. If you are experiencing one of these instances, you can always opt for a personal line of credit, usually called a student line of credit. 

A student line of credit can be a saving grace as it does not specify the use of the money. That being said, it does have stricter repayment policies, requirements, and interest rates. Therefore, before you opt for a line of credit, it is essential to know the different types of credit you can opt for.

Certain lines of credit require a cosigner to be approved; this could be your parent or guardian. This helps to minimize the bank’s risk, which can translate into a lower interest rate for you. However, certain lines of credit start accumulating interest from the time the loan is given, and some students might have to make monthly payments while attending school. These stipulations differ based on the policies of the financial institution that is giving you the loan.

The other type of line of credit offers a bit more lenience. Some lending institutions offer students a grace period of up to a few months after graduation before they need to start paying back their loans. After they have graduated, they are expected to make monthly interest-only payments on their student line of credit instead of the principal. Again, these details can vary depending on the institution.

How to manage student loan debt

Does the whole idea of college debt seem overwhelming to you? Well, you aren’t alone. Thousands of students around the country are inundated by loan repayments. Somehow, they manage to work it out for themselves.

Their experience shows that the best way to pay off debts is to have a solid money management plan and follow it. In fact, coming up with a strategy to manage your student loans is critical to your long-term financial health. Do it right, and you’ll be debt-free within a few years. You’ll free yourself to go after your dream career, home or business. But, of course, it’s also a good idea to stay on the lookout for government debt forgiveness programs that you may qualify for to ease the burden. There are certain things that a student needs to consider to help them have little to no debt by the time they step out of their school and into the world. 

1. Know what you want to study and how much it’ll cost

Studying dentistry is relatively more expensive than getting a sociology degree. The degree or specialization you choose can be the deciding factor in choosing the size of your loan repayments that’ll be due a few years later.

If you can find a course or field with relatively low tuition cost but a higher chance of employment, go for it. That being said, never compromise on your interests. Look for cheaper alternatives in your relevant field and build up from there. Don’t just research the rate of hire. Make sure you understand the starting salary for new grads, the top-end earning potential, and the different job roles you can fulfill with your degree. 

2. Pick your campus wisely

One of the most significant expenses that a student accrues is the cost of living. Students often opt for universities halfway across the country and either live in dorms or off-campus lodging.  That takes an enormous chunk of your budget. The best way to control costs is to pick a campus that is close to your home. It is much easier to pay for gas and parking than an entire room or apartment for a semester.

If your dream university is halfway across the country and you want to go there no matter what, try going for the renting option. Although still expensive, renting an apartment with another student can help you drastically cut costs. That can help you borrow less and keep your student loan small. 

3. Make a budget and stick to it

Budgeting is your best friend during student life. Simply put, budgeting is keeping track of the money you have and the expenses you need to pay. Budgeting during your college or university days can give you a clear picture of your costs and what you need to do moving forward.

Before you start worrying about your expenses, you need to calculate your income. This can be the wage from your part-time job, monthly allowances from family, or monthly dividends from investments that you may have made. Once you have your income down and are aware of your liquid assets, your next step is to note your expenses.

Start with the fixed amounts that you have to pay every month. This can be rent, student loan payment, utilities, etc. Then you start noting the other things you spend money on each month: variable costs such as gas for your car, groceries, clothes, video games, etc.

Once you have them, see if you are at a surplus at the end of the month. If yes, then you are doing well, and you probably have nothing to worry about. If your expenditure exceeds your earnings, then it is time to start cutting down. You can bring your expenses down by minimizing your variable costs. Sometimes you can also cut down on your fixed expenses too, like moving somewhere with cheaper rent, or downgrading your mobile phone plan. Always aim to have a positive income-to-expense ratio, which means having extra money left over after all your expenses have been paid. 

4. Start repaying student loans ASAP

In general, students benefit from a 6-month grace period after they complete their degree before they have to start repaying their loan. However, interest can accumulate during this time. Making repayments as soon as possible will reduce your debt.

Repaying your government loan

Once you have graduated, you will receive a letter from the government outlining your loan, interest accrued, and repayment schedule. Paying off student loans is not an easy task and can take years to pay off. Debt can weigh on the person, but there are ways to speed up the repayment process. 

The government offers “forgiveness programs” to students to remove some of their debts. Depending on where you live, specific eligibility criteria allow you to have some of your loan written off. That can help you pay down your student loan faster, and become debt-free sooner. 

What if I can’t repay my loans?

There are legal repercussions for not paying your student loans. There are two levels of defaulting on your payments. After 90 days of non-payment, the first strike classifies the student debt as delinquent and negatively impacts your credit score. If this non-payment continues after 270 days, the loan is in default and may be transferred to recovery agents and collection agencies.

This may be scary for many people, but the government has specific plans to help you with the repayment process. Depending on the state that you are in, you can apply for a repayment assistance plan (RAP).

RAP details may vary according to province, but they are similar to the federal RAP. Here is how it works:

When applying for an RAP, you are required to state your financial situation and prove that your current income is not enough to support monthly debt payments. You will need to show details about your monthly income so RAP can assess if you should be allowed to make smaller payments.

There is no limit on how many times you can apply for RAP, and you can apply for it at any time of the year. The only requirement is to reapply every six months if the need persists. Furthermore, to help students further, if you have been eligible for RAP for over 60 months, the government starts paying the difference in your monthly payments to help you repay the entire debt amount.

What are the disadvantages of refinancing student loans?

People can refinance all kinds of loans by themselves to simplify the repayment process. But it may not always be the best option. Trying to refinance your student debt could get complicated and you could lose repayment flexibility.  

For starters, when you refinance a student loan or consolidate debt, you no longer owe the government, but the bank instead. As a result, you will no longer be eligible for student loan help programs and other government-funded loan forgiveness programs. If your financial situation changes for the worse, you don’t have the same repayment options available. 

Another disadvantage is that you lose out on tax deductions. That’s right, the interest is tax-deductible for government-issued student loans. That can go a long way in helping you save some money every year. Unfortunately, this tax deduction isn’t available for bank-issued private student loans. Forgiveness programs and repayment assistance plans are specific to certain parts of Canada. Not all provinces practice it. In that case, you can go for debt financing.

However, only a few banks offer debt financing specifically for students trying to pay off their debt. This type of debt financing considers that a student may not have the right means to pay back the loans, which is why you can probably get a low-interest rate. That being said, it is advised to keep debt financing as the last option.

If you can find a private lender who caters specifically to students, you are in luck. Otherwise, the chances are that debt consolidation will likely result in a higher interest rate and more payments over time. Try to avoid refinancing your student loan.