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 fully 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 that is charged on student loans can either be a variable rate of prime + 2.5% or a fixed rate of prime + 5%. Both of these rates are reasonable for students that are recently graduating and the rates become even lower after tax credits are factored in. All interest that is paid on government student loans is subject to a 20.06 % tax credit. This essentially means that for every $100 of interest paid, the result will be a tax savings of $20.06.
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 Federal and Provincial governments will make interest payments on one’s behalf. 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 “Repayment Assistance Plan” and “Debt Reduction Program” for their Federal and Provincial loans respectively. These programs reduce the amount of student loans outstanding in order to make the payments more manageable. In addition to these debt programs, one can also apply to have their loan repayment period extended to almost 20 years. This will also 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 provincial portion of their student loans. These professions include: nurses, midwives, physicians, physiotherapists and the underserved communities include areas like Prince George & Nelson. If one participates in this program for 3 years, their entire provincial student loan could be forgiven! A similar program also exists for provincial government employees.
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 forgiveness application, they could end up paying several thousand more dollars, plus interest. 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.
Troy Peart B.B.A., CFP, CFA can be contacted at firstname.lastname@example.org.
Your questions, comments or suggestions for future articles are encouraged.