Student Loans in Canada: How Does It Work?

Every year people search for student loans in Canada to make their dream of higher education a reality. Despite the rising costs of education, many people still head to college because they believe it’s an investment in their future. They cut down on expenses, tap into unique resources, and even take on freelance jobs, doing whatever it takes to pay for their education.

But not everyone has multiple options to pay for college, and it can be utterly confusing to look for scholarships and financial aid. There isn’t enough for everyone. That explains why student loans are rapidly rising in Canada, with the average debtor owing over $28,000.

The impact of student loan debt in Canada

University education is one way to gain the required skills to secure a well-paying job. That being said, the impact of student loans is still considerable when we talk specifically about Canada. Currently, the student debt in Canada is averaging $15,300 for college and $28,000 for university students.?

Additionally, student loan repayment starts right after graduation. The loan restricts them from becoming genuinely financially independent and achieving their personal goals. Graduates get so caught up in making loan payments that their dreams of buying a new house or starting a business venture go on the back burner.

A study showed that student loans in Canada have gone from 15 billion to 18.7 billion in the span of 7 years. Due to this rise in debt, the government has started working on forgiveness of student loans in Canada. Moreover, certain Canadian activists and decision-makers want to cancel loans of up to $20,000 for every Canadian.

Types of student loans

Most people are under the impression that only government student loans are an option. However, there are several loan options to choose from. No matter how you choose to finance your education, each option comes with unique interest rates, leverages, and repayment methods.

Government student loan programs

If you go for the government student loan route, you have two options: the Canada Student Loan Program (CSLP) and the Canada Student Grant Program (CSGP). Let’s discuss the requirements of each, as well as the difference between loans and grants.

Canada Student Loan Program

If you are looking to pursue your studies, full-time or part-time, you can apply for a CSLP. Under the CSLP, a student can get a loan to cover up to 60% of their tuition fees. There are specific requirements to qualify for this loan. These include having a permanent residency in Canada, in the province which issues the grants or loans

Furthermore, students need to be enrolled in a degree program for 12 out of 15 weeks. Finally, a full-time student must take at least 60% of the entire course load in the year to be eligible. But these requirements can be eased for part-time students.?

Canada Student Grants Program

Federal student grants are the Holy Grail for students. Of course, the eligibility criteria are strict, and not everyone eligible can get the grant. But if you do receive it, you can use that money towards your education without the need to repay it.

To qualify for a CSGP, students need to demonstrate serious financial need. Then, if your application is accepted, you can get the grant money. There are other categories for people with disabilities or parents.

Private student loans

A student line of credit can be a saving grace as it does not specify the use of the money. That being said, it does have stricter repayment policies, requirements, and interest rates. Therefore, before you opt for a line of credit, it is essential to know the different types of credit you can opt for.

Certain lines of credit require a cosigner to be approved; this could be your parent or guardian. This helps to minimize the bank’s risk, which can translate into a lower interest rate for you. However, certain lines of credit start accumulating interest from the time the loan is given, and some students might have to make monthly payments while attending school. These stipulations differ based on the policies of the financial institution that is giving you the loan.

The other type of line of credit offers a bit more lenience. Some lending institutions offer students a grace period of up to a few months after graduation before they need to start paying back their loans. After they have graduated, they are expected to make monthly interest-only payments on their student line of credit instead of the principal. Again, these details can vary depending on the institution.

Bank student loans

Banks offer loans for all sorts of needs, from home loans to car loans. Similarly, you can opt for a student loan from a bank to pay for your college or university tuition costs. Furthermore, banks can give you loans that need to be paid back every month over a specific period. Since it is paid back in monthly installments, it is advised only to borrow the amount you need to keep your payments manageable.?

Provincial student loans

Individual provinces offer their own student loan programs, too. Each of these loans has a different interest rate depending on which province is funding it. The following table explains the interest rate and features under each province.

How to manage student loan debt while in school

Does the whole idea of college debt seem overwhelming to you? Well, you aren’t alone. Thousands of students around the country are inundated by loan repayments. Somehow, they manage to work it out for themselves.

1. Know what you want to study and how much it’ll cost

Studying medicine is relatively more expensive than getting an MBA. The degree or specialization you choose can be the deciding factor in choosing the size of your loan repayments that’ll be due a few years later.

If you can find a course or field with relatively low tuition cost but a higher chance of employment, go for it. That being said, never compromise on your interests. Look for cheaper alternatives in your relevant field and build up from there. Don’t just research the rate of hire. Make sure you understand the starting salary for new grads, the top-end earning potential, and the different job roles you can fulfill with your degree.?

2. Pick your campus wisely

One of the most significant expenses that a student accrues is the cost of living. Students often opt for universities halfway across the country and either live in dorms or off-campus lodging.? That takes an enormous chunk of your budget. The best way to control costs is to pick a campus that is close to your home. It is much easier to pay for gas and parking than an entire room or apartment for a semester.

If your dream university is halfway across the country and you want to go there no matter what, try going for the renting option. Although still expensive, renting an apartment with another student can help you drastically cut costs. That can help you borrow less and keep your student loan small.?

3. Make a budget and stick to it

Budgeting is your best friend during student life. Simply put, budgeting is keeping track of the money you have and the expenses you need to pay. Budgeting during your college or university days can give you a clear picture of your costs and what you need to do moving forward.

Before you start worrying about your expenses, you need to calculate your income. This can be the wage from your part-time job, monthly allowances from family, or monthly dividends from investments that you may have made. Once you have your income down and are aware of your liquid assets, your next step is to note your expenses.

Start with the fixed amounts that you have to pay every month. This can be rent, student loan payment, utilities, etc. Then you start noting the other things you spend money on each month: variable costs such as gas for your car, groceries, clothes, video games, etc.

Once you have them, see if you are at a surplus at the end of the month. If yes, then you are doing well, and you probably have nothing to worry about. If your expenditure exceeds your earnings, then it is time to start cutting down. You can bring your expenses down by minimizing your variable costs. Sometimes you can also cut down on your fixed expenses too, like moving somewhere with cheaper rent, or downgrading your mobile phone plan. Always aim to have a positive income-to-expense ratio, which means having extra money left over after all your expenses have been paid.?

4. Start repaying student loans while in school

If you have a well-paying part-time job, it is best advised to start paying off student loans while attending classes. This can help you bring down the principal amount. According to the law, students get a grace period of 6 months until they start accruing interest on their loan. Furthermore, they are not obligated to make payments until after you have graduated.

Making payments while attending classes, preferably in the first six months, can help you cut down your principal amount considerably. In addition, since interest is calculated against the principal amount, it can lead to less interest accrued over time. That makes repaying your loan significantly easier on you while you look for a job after graduation. It can take time to find employment, and your salary will be the lowest fresh out of school and new in your career. You want to think ahead to relieve yourself of as much debt as possible.?

This article is the shortened version of an article originally published on Hardbacon.ca by Arthur Dubois under the title "The Ultimate Guide to Student Loans in Canada".