Each year, countless students apply for government and bank loans to pay for their university or college education.
Thanks to rising tuition and living costs – and a generation of parents who never thought to save for their children’s education – undergraduates are coming out of college or university with an average of $13,000 to $28,000 in student debt, depending on the province.
Here’s some advice before you sign on the dotted line.
“Interest rates are low because the government is trying to stimulate the economy after the recession, but they will go up.” —Laurence Booth, professor, Rotman School of Management, University of Toronto
Government loans: More flexible
Both the federal and provincial governments offer student loans, and in five provinces the loans programs are integrated with the federal government. You must meet a number of criteria to be eligible for a loan, most notably the ability to demonstrate financial need.
Interest begins to accumulate on your loan as soon as you receive it (right now, interest rates for government student loans are relatively low at 5.5% and 8% depending on the terms of your loan), but you are not required to make any payments until at least six months after you finish your studies.
The government doesn’t want students to graduate with debt, says Laurence Booth, a finance professor at the University of Toronto’s Rotman School of Management. “There is a lot of political pressure to deal with high tuition and student debt, and there’s always the possibility that the government might forgive the loan sometime in the future.”
Government loans can be easier to obtain, particularly for students who don’t have a suitable co-signer. “Bank loans require students to have an established credit record at the time of application, or are required to have a co-signer,” says Anna Maddison, a spokesperson for Human Resources and Skills Development Canada. “Students applying for Canada Student Loans do not need a co-signer and most do not require a credit history to qualify for student financial assistance.”
If students have trouble repaying their loan, they may apply for assistance and the repayment period may be extended to 14.5 years, says Maddison.
Bank loans: Good for your credit rating, but be cautious
Students who do not qualify for any or enough financial aid from government student loans may choose a bank loan or student line of credit to pay for their education.
Bank loans are different from government loans primarily in that they typically require a co-signer with established credit, such as a parent, and you must begin making payments as soon as you receive the loan. The payment amount is typically based on the loan’s interest. Interest rates for bank loans and student lines of credit are also very low – in some cases even lower than government student loans.
Although you are required to make payments equal to the interest each month, repayment of the loan is typically deferred until up to one year after you finish school.
If you don’t make the required payments, either while you’re in school or after you’ve graduated, both your and your co-signers credit rating will be negatively affected and the bank may pursue your co-signer to pay for the loan.
“Think about where you’ll be after graduation. Short term loans are very cheap, but if you can’t repay soon, take a long-term loan,” says Booth. Most student lines of credit from banks are designed to be paid off in the long-term.
He also warns that interest rates will soon rise. “Interest rates are low because the government is trying to stimulate the economy after the recession, but they will go up. I fully expect we’ll see short term interest rates a lot higher. It’s also important to remember that you never know when the terms of any loan will change.”
According to Booth, the “big advantage that comes with borrowing from banks is that it will help your credit rating if you make your payments on time.”
What do you think is the best option: borrowing from the government, or from banks? Does it make a difference where you borrow from?