Student loans can be a wise investment. A primer on how to get the most out of them.
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Student loans can be a wise investment. A primer on how to get the most out of them.
If you’re a first-year Can-
adian college or university student, you’re probably not old enough to buy a drink. If you’re under 18, you can’t vote. You can’t get your own credit card. But as early as age 16, you can sign your name to a contract that offers thousands of dollars up front, and, if you read the fine print, promises years’ and
even decades’ worth of financial obligations after graduation. It’s called a student loan. Forty per cent of full-time post-secondary students receive government student loans each year. Many don’t understand what they’re getting into—or how, if they’re not careful, they can end up with crippling, life-altering debts.
Flere’s the big picture: according to the most recent data, 350,000 students borrowed an average of $5,631 in federal loans during the 2005-2006 academic year, a jump of 17 per cent from the year before. The average newly minted bachelor’s degree-holder graduates with over $20,000 in government student loan debt, which will take her 9V2 years to pay off.
For many students, attending college or university wouldn’t be possible without student loans. The Canada Student Loan Program (CSLP) offers funding to students whose expenses exceed their resources. In most provinces, when you apply for a CSLP loan, you’ll also automatically be applying for a provincial loan. There are limits on how much you can receive and under what conditions— and the system is designed to supplement your own finances, not cover the entire cost of your education. The maximum annual amount you can receive varies by province, institution and program; the lifetime max-
AS LONG AS YOU’RE IN SCHOOL, YOU DON’T HAVE TO MAKE PAYMENTS AND WON’T BE CHARGED INTEREST
imum limits student loan funding to 340 weeks of study up to $50,000 unless you are a doctoral student or have a permanent disability. In most cases, you will be eligible for a maximum of 60 per cent of what is called your “assessed need” from the Canada Student Loan Program; you may also be eligible for additional funds in provincial loans. To
determine your assessed need the CSLP calculates the cost of your tuition, books, housing, food, and other expenses and then subtracts your resources, including savings, assets, part-time work income, parental income, and awards. You can estimate your assessed need with the online calculator at canlearn.ca.
If you’re expecting a loan, have a backup plan. Many students get a nasty surprise when they discover that they won’t be receiving as much funding as they’d hoped for. This can happen for a variety of reasons. For instance, whether or not your parents are helping to support you, parental income matters when applying during the first four years of study. Some students get caught in the middle-class gap: their parents don’t earn enough to help pay for school, but they do earn enough to reduce the size of CSLP loan.
Depending on your financial situation, you may want to consider other forms of debt. Many students get both government loans and a student line of credit from a bank. Lines of credit (LOC) are more flexible than student loans since you can borrow only what you need, when you need it. If your parents co-sign the LOC (which they will likely be required to do), the interest rate on an LOC may be lower than on your student loan.
Yet in most cases, government student loans are still the best option since you won’t have to pay a cent until six months after graduation, no interest is incurred while in school, and assistance programs like Interest Relief and Debt Reduction are available for those who have trouble paying. You are required to pay interest monthly on most lines of credit and, unlike government student loans, the interest paid cannot be claimed as a tax credit. But be wary of taking on an unmanageable level of student loans: federal law prohibits you from filing bankruptcy on them for 10 years.
A debt option you’ll be bombarded with on campus is a credit card. A responsibly used credit card can be useful for building your credit rating, says Elena Jara, education coordinator for credit counselling non-profit
Credit Canada. But be careful. “This is the first time students have that decision-making power and can get that card, but they don’t understand what that entails.” Jara recommends educating yourself in advance by checking out the Financial Consumer Agency of Canada’s website. It lists credit card interest rates and policies.
Once you have your loan, the most obvious way to avoiding a decade being ground down by post-graduation loan payments is to limit your expenses. But this takes more than simply cutting back on Thursday nights at the campus pub. According to Jara, it takes smart and detailed budgeting. “You need to understand your income and all of your monthly expenses,” she says. “That’s a big problem when people are creating budgets. They say, ‘Oh, I’m not going to spend money on cigarettes. I’m not going to go out.’ By the second week, they say, T can’t live like this,’ and they blow their budget.” To help create a realistic budget, use the online tools at canlearn.ca, and on the Student Finance 101 section of macleans.ca/oncampus.
One way to limit expenses is to live at home. As much as you may be aching to leave the nest, consider this: an additional $5,000 in debt means an extra $1,500 in interest over 10 years. Also, make sure you’re applying for all scholarships and bursaries available to you, make some cash by working in the summer, and talk to your family about any help they can offer.
Once you have a student loan, you must regularly update the National Student Loan Service Centre (NSLSC) and your provincial lender about your educational progress. It’s up to you to ensure that both agencies know when your study end date is, if you become a part-time student, switch schools, or if your financial situation changes. If you don’t reapply for a new loan each year, you must submit a form to demonstrate that you are still a student in order to maintain interest-free status. If you neglect to update either the province or the NSLSC, you could end up in default and be forced to pay outstanding interest before being reinstated to interest-free status or allowed to apply for new loans.
Disputes between the NSLSC and borrowers are unfortunately common. To make sure their mistakes—and the NSLSC does make mistakes—don’t get pinned on you, Julian Benedict of the Coalition for Student Loan Fairness advises borrowers to create what he calls a “neurotic portfolio.” Keep a file with all paper correspondence, applications and supporting documentation, loan agreements, and a record of every telephone conversation you have with NSLSC agents, including the date and their ID
number. This file will also come in handy if your application is audited.
Once you’ve finished your degree, there is a six-month grace period before you are required to begin making payments. But because interest begins to add up as soon as your study period is over, it’s best to start paying off the loan as soon as possible. Once the graduation hangover has worn off, call
Student loan checklist: 10 tips
1. Limit your dependence on student loans: work during the summer, apply for scholarships, ask family for help and consider living at home.
2. Have a backup plan in case you don’t receive as much funding as expected.
3. Consider other forms of debt such as a student line of credit.
4. Create a budget—and stick to it.
5. Remain interest-free during school by updating Canada Student Loans or your provincial lender on any changes to your status.
6. Keep all loan-related documents, and have a record of all phone calls to the National Student Loan Service Centre.
7. Before graduation, educate yourself on consolidation contracts and start making payments as soon as possible.
8. Apply for additional credit, such as a car loan, before you start repaying your student loan.
9. Avoid extra interest payments: don’t extend your repayment term.
10.If you have trouble paying your loans back, investigate interest relief and debt reduction programs.
the NSLSC and ask for a statement and your consolidation contract. To estimate your student loan payments, visit canlearn.ca.
If you plan to apply for other loans after graduation, such as a car loan, or plan to sign a lease, you’re best to do it before finalizing your consolidation contract. Once your monthly student loan payments are listed on your credit report, it will be more difficult to obtain more credit. For this reason, Benedict urges borrowers to keep their scheduled loan payments low to avoid tapping out credit. You can make additional payments easily if you can afford more.
Once you have received your consolidation contract, educate yourself on the terms. Jara says that many new graduates simply don’t ask the right questions. “They want to
know what the monthly payment will be but don’t ask about the interest.” Use a service like Credit Canada to determine whether you should choose a fixed or floating interest rate. The fixed rate is higher than the floating rate; the prime rate (recently 4.25 per cent) plus five per cent is the fixed rate; the floating rate is prime plus 2.5 per cent.
Avoid what the NSLSC calls a “revision of terms,” which allows borrowers to pay a smaller monthly payment by extending the period over which the loan will be paid back. Here’s why: if you have a $30,000 loan consolidated on a fixed rate of 9.25 per cent and want to pay it off in 10 years, you will have to make monthly payments of $384. Your total interest costs will be $16,091. Extending the repayment period to 15 years will bring your monthly payment down to $308, but the longer term also means that you will pay almost $10,000 more in interest.
If at first you have trouble paying back your student loan, you are not alone. Forty per cent of university students, 50 per cent of college students, and 65 per cent of private college studentfe receive interest relief, are in arrears for four or more months, or outright default. The bumps are usually hit during the first two years after graduation.
Even if you don’t land a steady job after graduation, there are a number of ways to avoid default—and the corresponding black mark on your credit report. Benedict recommends applying for interest relief even if you are not sure if you qualify. Once you’ve maxed out interest relief, you may qualify for up to $26,000 worth of debt reduction, if you’ve been out of school for at least five years and face exceptional long-term financial hardship. Finally, make sure you have overdraft coverage on your bank account so you won’t bounce a loan payment if your rent cheque is cashed on the same day.
You can save a lot in interest costs if you do some basic arithmetic. Find out which of your loans has the highest interest rate. Pay it off first. Do you have significant savings? You’ll be further ahead if they are used to pay down loans. And if you qualify, consider rolling your student loan into a bank loan with a lower interest rate, such as a mortgage.
Even in your darkest loan repayment moments, remember that post-secondary education is a long-term investment. The rewards may not be instantaneous, but in the long run, most graduates find that the time and money were well spent. M
For more advice, visit macleans.ca/ oncampus and click on “Student Finance 101.” Looking for money for school? Go to macleans.ca/oncampus and click on “Scholarship Finder.”
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