Written by Troy Peart
Congratulations, if you are one of those fortunate individuals that has recently seen their hard work pay off by graduating from a post secondary institution! Now you are officially ready to join the “real world” (unless of course if you decide to continue on with post graduate studies). Before running out and securing 0% financing on the latest SUV, one should take this opportunity to examine their financial planning opportunities/issues.
This leads us to this month’s topic, government student loans. Government student loans (federal & provincial) are intended to help students pay for the cost of their post secondary educations. The proceeds of this program can either be awarded as a loan or as a combination of a loan and a grant (free money). While enrolled in full time studies, the interest on any outstanding loans is paid by the government. However, these favourable conditions change after graduation or when one ceases being a full time student.
Once an individual is no longer a full time student, they have 6 months to arrange the conditions of repayment with the financial institution(s) that holds their loans. This process is called “consolidation”. Despite the fact that the first payment on a student loan is not due until the 7th month following full time student status, interest begins to accrue immediately. The interest rate that is charged on student loans is calculated at a variable rate of prime + 2.5%. The prime rate is currently 4.75% but it fluctuates periodically based on prevailing interest rate conditions. This interest rate is reasonable for students that have recently graduated and the effective rates become even lower after tax credits are factored in. All interest that is paid on government student loans is subject to a 20.24 % tax credit. This essentially means that for every $100 of interest paid, the result will be a tax savings of $20.24.
Another unique feature of government student loans is the potential for interest relief. Interest relief is a feature that can be utilized if one is unable to make loan repayments due to financial hardship. If granted, the government will make interest payments on one’s behalf for a period of up to 54 months. It is imperative that one keep up to date with their loan re-payments prior to applying for interest relief because one will not qualify for the program if their loan is in arrears. If one exhausts their maximum interest relief period, they may be eligible for the “Debt Reduction Program”. This program reduces the amount of student loans outstanding in order to make the payments more manageable. In addition to the debt reduction program, one can also apply to have their loan repayment period extended to almost 20 years. This will have the affect of reducing monthly payments.
If one is fortunate enough to have graduated in a program in which the government would like graduates to re-locate to underserved areas in BC; one could be eligible for a 33% reduction (per year) of the BC portion of their student loans. These professions include: nurses, midwives, physicians and the underserved communities include areas like Prince George & Nelson. If one participates in this program for 3 years, their entire BC student loan could be forgiven! Similar programs to reduce varying amounts of BC student loans have recently been added for employees of the BC Public Service as well as graduates in early childhood education programs.
Government student loans are a unique tool that is available to current and former students. Due to its unique qualities (that always seem to be changing), it is imperative that one understand the specifics of student loans and how they directly pertain to them. For example, if an individual missed the deadline for their loan remission application, they could end up paying several thousand more dollars, plus interest. It is also important to note that if one repays their government student loan with a consolidation loan provided by a bank or other financial institution, that all of the aforementioned benefits are no longer available. As details like these are often overlooked (or are not disclosed) by various government agencies or financial institutions, it is recommended that knowledgeable professional advice be consulted upon graduation. I personally have encountered far too many former students that could have benefited significantly from an understanding of these intricate details.