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Student Debt: Understanding the Repayment Assistance Plan

Nov. 26, 2013
3 mins
A young professional works on her laptop outside of a student campus

Here's a bulletin for the graduating class of 2013: Even though you may believe otherwise, your federal student loan just came due.

That's right; it's time to pay up. In fact, your loan balance actually started growing right after graduation day. That’s because interest starts to accumulate on your loan principal as soon your full-time studies are over.

That six-month grace period you may have heard about is really an illusion – it’s the payments you’re deferring, not any interest costs.

The interest metre has been running all along. While you were in school full-time, the federal government paid the interest on your student loan for you, as long as you confirmed your enrolment to the National Student Loan Service Centre (NSLSC) each year. But that support essentially ends as soon as you return your gown.

Check the rate on your loan

The Canadian Federation of Students maintains the average debt – including loans from friends and family – for university graduates has now climbed to $37,000. And while mom and dad may be prepared to wait a bit, your other creditors will prove less patient.

Right now, you're looking at a floating rate of prime plus 2.5% (which currently adds up to 5.5%) or a fixed rate of prime plus 5% (effectively 8%) on your debt — not an outrageous tariff compared to credit card rates, but way higher than what anybody is paying on a mortgage.

In other words, student loans are not cheap debt. And, while that interest does provide some tax relief, it’s nothing to get excited about – particularly if you’re in a low tax bracket. For every $1,000 in interest, you’re entitled to a 15% federal tax credit, plus the provincial equivalent.

Pay things off as quickly as possible

Once you know how much you owe, the default option is to have things settled over a 10-year period. But you can pay off the balance faster if you like, without penalty.

Let’s say your folks spotted you the first $10,000 and you choose the variable rate and the default repayment schedule on a $27,000 balance. The total cost over 10 years? You’re looking at $8,387, assuming a monthly payment of $301. But what if you decided to reduce the amount of time you took to repay the loan by half? Sure, you’d have to come up with more upfront — $530 a month — but you’d save a stack of interest over those five years: $4,335 to be exact.

Get some relief when you can

The truth is many people find themselves struggling financially during the first few years out of school. If you're one of them and are having trouble paying off your loan, there are a few options for relief.

The government's Repayment Assistance Plan is designed to ensure that your payments are reasonable given your family's financial circumstances, don't exceed 20% of your income and can be cleared away in less than 15 years, for instance. If you're struggling to make the monthly payments you agreed to, you can ask to stretch out the period during which you expect to pay off your loan, which will lower your monthly payments but result in more interest costs.

Concentrate on the principal

If that's not enough, assuming you qualify, your monthly payments can be directed toward your loan principal exclusively for up to five years, reducing your total debt more quickly.

The federal government will cover any interest that the more affordable payment doesn't cover. If you've been struggling this way for at least five years and are still underwater, you might then be eligible for further relief. In this instance, the government will consider reducing the amount of money you owe while still looking after the interest.

Gordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a consulting firm focusing on retirement readiness. Gordon was a columnist for the Globe & Mail and Morningstar for many years and is also currently a columnist for Investment Executive, Canada’s national newspaper for financial advisors.

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