The following article is contributed by HigherEdPoints, a company that helps students pay for post-secondary school tuition by converting accumulated points from loyalty programs into accepted currency at most Canadian colleges and universities.
Many students take out student loans, and for almost all, this is their first experience with getting a loan. The most common student loans include federal, provincial, and private loans from a bank. But which is best? HigherEdPoints is here to help you figure it all out from interest rates to personal loan calculators.
For most students, government loans are the first place to turn. The Canada Student Loan program (federal) along with each province’s own loan programs will assess applicants’ financial need. Funding is provided by both the federal and provincial governments and includes a loan portion (has to be repaid) and a grant portion (doesn’t have to be repaid). Since the founding of the Canadian Student Loan Program in 1964 more than $54.1 billion has been disbursed to 5.8 million students. Visit the Government of Canada website for specific information.
Government student loans don’t require the borrower to make payments while enrolled in school and include a post-graduation repayment grace period of six months. Interest doesn’t start to accrue on the federal portion of loans during that grace period, but in some provinces, interest will begin to accrue upon graduation. That’s the thing that is important to remember; on all loans, you’re paying back the loan plus interest. The faster you can repay them, the less interest you’ll pay.
Part of the reason the government gives such support to students is because of the realities of getting a private loan. Most young people have no history of credit, and so can’t get a loan from a bank. Sometimes young people with no credit history can get private loans by either putting up something of value as collateral (if you don’t make the appropriate payments at the right times the bank becomes the owner of the collateral) or by having an individual such as a parent or relative with a good credit history co-sign the loan, making them equally responsible for its repayment.
Unlike government loans which generally provide the same services and rates for everyone, private loans have a wide variety of options, but these tilt in the lenders’ favour. With private loans, the greater the risk that you will not be able to pay it back, the higher the interest rate and the more limited are the terms. And this is important when the average amount of time it takes a student to pay off their loan is 10 years.
How to work your loan
This all may sound a bit overwhelming but it’s a good idea to apply for government student loans. Every government program has a grant portion (which doesn’t have to be repaid) and a loan portion (which does have to be repaid). You can accept just the grant and decline the loan. Also, many schools have additional funding that is triggered by a student’s status as a government loan recipient. If you don’t get the funding you need there is a process to appeal the decision and sometimes exceptions can be made.
Some students choose to get a government loan but put it in a separate bank account and don’t touch it unless they really need it. As soon as they’ve worked enough hours to get back on track, they’ll repay the loans they’ve tapped into. Their plan is to repay all their loans as soon as they graduate — interest-free!
With each loan provider be it the government or a bank, the issue of the interest rate is an important consideration. And interest rates come in the form of fixed-rate and floating rates. As we’ve mentioned, the Canada Student Loans Program gives you a six-month grace period where you will not have to repay student loans and no interest accrues (visit the Canada.ca website for specifics on each province). By default, your student loan will be set as a floating rate loan. You can switch it at any time to a fixed-rate loan, however, you will be unable to switch it back to a floating rate once you make this switch. Here’s the difference between the two.
Quite simply, fixed-rate loans have a fixed rate that stays the same for the duration of the loan. This type of loan eliminates uncertainty because it allows you to calculate future interest payments and plan accordingly. This can also be helpful if the prime rate rises above your fixed rate because you won’t end up paying more. However, the flip side to this is that if the prime rate falls below your fixed rate, you may end up paying more than you would if you had a floating rate. This type of loan is good for those that like to plan and need to know exactly how much they’re paying in total. Canada Student Loans that are fixed-rate loans charge an interest rate of the prime rate (at the time you make the change to a fixed rate) plus two per cent. So if the prime rate when you make this switch is three per cent, you would end up paying five per cent interest for the duration of your loan.
Floating rate loans, or variable rate loans, have an interest rate that fluctuates over the duration of the loan period. This fluctuation is based on the prime rate and is the default to which your Canada Student Loan is set. This type of loan means interest can be harder to predict, but you may end up paying less in the long run if the market trends in your favour. The prime rate for Canadian student loans is calculated using the interest rate of the five largest Canadian banks and there is no additional percentage added, so if the prime rate is three per cent, your interest rate is three per cent. If it changes to five per cent a couple of months later, so too does your interest rate.
Personal loan calculator
Right now it is the summer of 2020 and interest rates are low, very low, and are expected to remain that way for some time. This means that currently, a floating rate is your best bet. Not sure? Try a loan calculator. What it does is give you a chance to calculate how much interest you will pay by factoring in the amount of the loan, the interest rate, and the amount of time it takes to pay the loan when making monthly payments. Try this loan calculator by the Canadian Government or a more general loan calculator like this one from TD for a quick insight into how long it would take you to pay off your student loans, and how much interest you would pay. This is why it’s so great that your government student loans can be paid with HigherEdPoints in lump sums of $250. Try experimenting with the loan calculators to see how much less interest you will be paying if you use HigherEdPoints. To test this out, just deduct however many payments with you want to start with from the initial sum and recalculate. For example, if you think you could start with $750 in loan repayments through HigherEdPoints, just subtract $750 from your total and recalculate. You might be surprised how big of a difference using HigherEdPoints to repay some of your student loans makes!
There’s one more benefit to getting government student loans — the government has your back. We never know what is coming, so if you run into some trouble the Canadian government does offer the Repayment Assistance Program (RAP). If your monthly loan payment is more than 20 per cent of your income you can apply to have it adjusted or suspended for six months to give you the time to get things in order. If you still need more help you can re-apply for RAP every six months.