Making sound loan decisions

Students choose between federal loans and bank loans

Karla Karcioglu, Roving Editor Ω

Students need to be better informed about the best ways to pay for school and manage student debt. meddygarnet/Flickr Commons

Students need to be better informed about the best ways to pay for school and manage student debt. meddygarnet/Flickr Commons

With high tuition rates, the cost of books and increasing living expenses, working to pay for school can begin to interfere with the quality of a student’s post-secondary education. Many students are forced to choose to use loans to cover expenses while in school. Having a Canada student loan provides students with many benefits over a bank loan, but it is still up to the student to manage their debt responsibly.

According to a 2012 survey of 1,018 post-secondary students by Bank of Montreal, 49 per cent of students were using loans to pay for their education. Of those surveyed, 58 per cent expected to graduate with $20,000 or more in debt and 21 per cent expected to graduate with $40,000 or more owing. Only 44 per cent of students expected to have their debt paid off within five years of graduation.

Gordon Down is the manager of the Financial Aid and Awards department at Thompson Rivers University. He is concerned that students often don’t understand what it means to borrow money to pay for school and put off figuring it all out until they graduate, and are left with a surprising amount of debt.

Students using Canada Student Loans have several advantages over students on other private loans, Down said. He cringes when he hears students say they took out a lower interest bank loan to pay off their student debt, because the student loans provide a safety net for borrowers.

One benefit of a government student loan is it gives graduates, or those who stop attending school, a six-month interest-free grace period. However, once the interest free period has ended borrowers will be asked if they would like to take the accumulated interest from that grace period and apply it to the principal amount they owe, or pay it off immediately. On the seventh month, monthly loan payments will be automatically withdrawn from the borrowers bank account, Down said, as per the loan agreement.

Borrowers do have the option to contact National Student Loans Service Centre to decrease their monthly payment amounts, however if their bank account doesn’t have sufficient funds, or has been closed, the borrower faces entering into loan default, which will impact their credit rating, Down said. The loan will be sent to the Canada Revenue Agency as default if a borrower does not make a payment for nine months, or 270 days.

“If, at any point, the person who’s no longer a full-time student cannot afford to make all or part of their loan payment, [and] if they fill out the forms to tell the government that, then the government will continue to pay all or a part of the interest on the amount owing, for up to five years,” Down said. This option is available at any time while a borrower is in repayment. A bank would not be sympathetic to a borrower if their income is interrupted due to an injury or unemployment, Down said.

If a student has exhausted the five years in which the government will cover interest payments and they still cannot afford payments, they can apply to have the government write down the principal debt owing. They will calculate exactly how much the borrower can afford per month and subsidize the loan to an amount that creates an affordable monthly payment, Down said.

A third benefit of a government student loan is that if a borrower dies, the amount owing is cleared by the government, whereas a bank would come after the estate to pay off any remaining debt.

“There’s a handful of student deaths a year,” Down said. “Typically, one or two of those have student loans.”

The struggle

“A student can choose the minimum payment, which like any other debt is going to be punishing in the long run with interest,” Down said. Borrowers are never prevented from making additional payments when they have additional income to help pay off their debt.

According to a calculation done through the loan repayment estimator at Canlearn.ca, a student who graduates with $20,000 and repays that debt in 120 months, or 10 years, using the interest free grace period, will pay $9,118.62 in interest.

A final benefit of a government student loan is that the interest payments are tax deductible, Down said.

“The idea is that for the student that is responsible and responsive, updating their address, keeping in touch, they’re [paying] what they can, there’s never a reason to actually go into default. And there’s never a reason they should have true financial hardship.” Down said.

“A big part of managing the debt is just not getting into it in the first place,” Down said.

Some things to consider to help you decrease your debt while in school include taking summer courses, for free, using the Canada Student Loans Grant for Part-Time Students. The grant will provide low-income students with up to $1,200 for less than nine credits per academic year. Grant money does not need to be paid back at the end of post-secondary education unless the student withdraws from courses or their financial need is re-assessed.

Another suggestion Gordon said is that students should refrain from spending their excess loan money on extra things like a new outfit or a vacation and instead use it to pay down their principal debt. He added that students should put the money straight toward their student loans instead of putting it in the bank because it will affect their need assessment for the following year.

It’s also very important to consider how much your future career will pay versus how much student loan debt you will graduate with, and how long it will take you to pay that off. “When TRUSU talks about student loan debt and unmanageable debt, it totally depends on what program you’re talking about,” Down said.

Some programs, such as law, may cost more but have a much higher average salary than other programs, such as social work. “What may be a high debt load for one, may be quite manageable for the other,” Down said.

Gordon said that even students who say they don’t want to incur any debt and don’t want to even apply for government student loans should apply anyways. That way the student can look at what they qualify for and make a decision about whether or not it’s worth it, and if they choose not to take out the loan they will not be penalized. Students may qualify for grants that accompany the loan, and if they want the grant but not the loan they can simply pay back the loan immediately while in school.

“You get the student who’s knocking themselves out working part-time or almost full-time, and it’s affecting their grades. And if they took out a bit of a loan, would they be better off graduating with a moderate amount of debt and a more solid education?” Down asked.

For more information on financing your education or paying back your student debt, visit the TRU Financial Aid and Awards office in OM 1631, call 250-828-5024 or email finaid@tru.ca.

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