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Jul 30, 2020
We are just around the corner from a return to school, whatever that will look like. For many students (and possibly their parents as well), it’s time to start thinking about how to pay for the return to school.
The Canada Student Loans program is likely the best-known financing source for students. This program is administered at the provincial level and includes both federal and provincial funds. The breakdown between federal and provincial lending varies by province, but the loan amounts are generally bundled together for most purposes. The Canada Student Grants program is a separate program that we will not deal with in this article, but is worth looking into, especially for lower-income earning single parents who may be contemplating a return to school.
Residents of a province must apply for Canada Student Loans through whichever provincial agency administers the loans. This is true even if that person will attend school outside the province. The amount that can be borrowed per semester varies by province. As an example, Alberta will lend a student up to $7,500 per semester including both federal and provincial funds. The lifetime lending limit in Alberta is $75,000. These amounts may be larger for professional programs.
No interest is charged on student loans while the student is in school. Students get 340 weeks (more in some cases) from the date of the first loan to begin repayment, or 7 months from the date of graduation, whichever comes first. No interest is charged while the student is in full-time studies. When interest starts being charged, it is charged at a variable rate based on the prime rate. Some provinces allow borrowers to elect to use a preferred rate (usually prime +2%) instead.
Amortization periods for loans vary based on the amount borrowed. As of today, in Alberta, amortization periods are 36 months for loans up to $3,000; 72 months for loans between $3,000 and $6,000; and 114 months for loans in excess of $6,000.
Credit adjudication for student loans is relatively simple. There are really only two questions. First, is the borrower a student at an eligible financial institution? Second, is the borrower in good standing on any previous Canada Student Loans? If the answer to both those question is yes, then a new Canada Student Loan should be available.
As an example, let’s say that Jennifer was 18 when she first started a four-year post-secondary program. Jennifer, a resident of Alberta, borrow the maximum $7,500 per semester for each of her 8 semesters of schooling. At the end of four years (approximately 190 weeks from the start of her schooling), Jennifer graduates with $60,000 of student loans. Interest starts to accrue at that point, using the prime rate. We’ll assume a 3% prime rate. If Jennifer takes the maximum available deferral and starts repaying her student loan in the 7th month after graduation, the balance by that time will be approximately $60,906. If she elects the maximum amortization period, her repayment schedule will be $615/mo over the next 9.5 years.
Assuming she graduated in April/May, her interest payable in the first full calendar year is approximately $1708. This amount is eligible for a non-refundable tax credit. If Jennifer does not have tax payable in a year when she makes student loan payments, she can defer that tax credit for up to 5 years. Unlike tuition tax credits, this tax credit is not transferable to any other taxpayer. Refinancing her student loans renders the tax credit unavailable. Every province provides this tax credit in addition to the federal non-refundable tax credit. If she is a resident of Alberta, this means up to $427 of tax savings in that year. This amount will decrease in later years as the loan principal decreases.
It is not possible to use a bankruptcy or consumer proposal to settle Canada Student Loans in the first seven years after the loan was made. In case of a default, Canada Revenue Agency is the debt collector for Canada Student Loans. This means they can use tax refunds to reduce student loan debt. While Canada Student Loans are in arrears, it is not possible to qualify for new loans until a payment arrangement has been made.
The Canada Student Loans program can be a very useful way to help fund an education. In Jennifer’s case, she was able to defer much of the cost of an education until she was in the workforce. It is important, before taking the loan, that Jennifer contemplate the repayment schedule. A monthly obligation of over $600 per month is significant.
If Jennifer’s employment provides her with enough of an increase in her earning potential to cover this, that’s great. On the other hand, if she did not increase her income earning potential by going to school, then this $600 per month is likely to create a significant burden. In my own experience dealing with my pro bono financial planning clients, I see many people who have taken poorly advised student loans and either graduated from programs that did not increase their income earning potential, or not graduated at all.