Paying for university with student loans is a popular way to finance education.
Student loans may be your first real experience with borrowing a large amount of money and there can be a steep learning curve. Financial concepts like interest rates, loan terms and repayment schedules can quickly snowball into a very stressful and costly post-graduation experience.
Below are four things to consider before signing on the dotted line of your student loans. But first watch as Jen and Eddie learn about student loans from…the lunch lady?!
If you’re a visual person, you might also find this Student loans 101 infographic helpful.
1. Your loans will either be government-issued or private
In general, student loans come in two forms:
- government-issued (federal or provincial)
- private (from individual lenders like credit unions or banks)
Government-issued student loans tend to come with incentives like fixed interest rates and the ability to restructure payments based on income; however, with a little research, you may be able to find a private loan with lower interest rates.
But the best loan isn’t necessarily the one with the lowest interest rate, so it’s important to consider the benefits of the different options.
For example, the interest paid on government student loans is tax deductible while interest paid on private loans is not (you can also carry forward that tax deduction for up to five years). Also, students with a Canada student loan don’t have to repay their debt until they are earning at least $25,000 per year.
2. Short equals less, long equals more
When it comes to repaying your loans, the faster you agree to pay off your debt, the more you’ll likely pay per month, but you’ll be spending less in interest over the life of your loan. Conversely, if you decide to make smaller payments towards your debt over a longer period of time, you may end up paying significantly more interest over time.
3. Loan repayment assistance may help in times of need
The National Student Loans Service Centre has some different programs in place in order to provide assistance to individuals struggling with repayment. Even if you are paying off a provincial student loan, you should still familiarize yourself with the national loan program, as all provincial student loans are integrated with it.
The repayment assistance options available through the National Student Loans Service Centre are:
- Revision of terms – you can ask to extend the amount of time it takes you to pay off your loan’s principal and interest by up to 15 years. This will make your monthly payments smaller, but you’ll end up paying more interest in the end because it will take you longer to pay back your loan.
- Two-stage repayment assistance plan – depending on your financial situation (for example, if you have a low income or a permanent disability), your monthly student loan payments could either be reduced or stopped.
Check with your lender to see if these options are available to you, and what the circumstances must be to qualify.
4. There’s a difference between refinancing and consolidation
Two options to help you get debt-free faster are consolidation and refinancing. Consolidation is the act of combining all of your loans into one payment with an interest rate that will likely be an average of your existing loans. Consolidation simplifies your payment process, but doesn’t necessarily reduce your debt burden.
Refinancing uses a new loan (hopefully with a lower interest rate) to pay off your existing debts. You’ll then make a single payment per month towards your new loan. The lower interest rate can help you dig out of debt faster. You’ll need to do a little research to determine which is best for your particular situation.
Keep in mind that consolidating or refinancing your government student loans will likely disqualify you from using the interest payments as a tax deduction.
Is taking out a student loan worth it?
It’s not an easy question to ask yourself, but it’s one worth considering: will the amount of money you’re likely to make at your job be enough to pay off your student loan debt?
For example, some lower-paying jobs may not actually end up being worth the price you’ll pay in the end.
Before you sign on to any loan, do the math to determine how long it will take you to pay back that loan at the average salary you will likely earn from your job, and determine whether or not you’re willing to be in debt for that amount of time.