With the ever-rising cost of post-secondary education comes increased student loan debt. Today's young graduates are beginning their careers with a bigger financial burden than ever before. Understandably, many are desperate to get rid of it as quickly as possible.
Of the many available options, some may consider taking out a personal to consolidate their debt into one easy payment. But is this a good idea?
Knowing the benefits of government-issued student loans compared to private lending alternatives can often be a vital tool when deciding how to best deal with student debt.
Grace Period
Most provincial and federal student loans provide a six-month grace period between graduation and the first required payment. Although interest accrues during this term, it offers leeway for students to get their affairs in order before tackling this significant financial responsibility.
On the other hand, personal loans are typically payable from the date they're issued and offer little leeway or flexibility in their payment schedules.
Borrowers can often choose between a fixed or variable interest rate for their government-issued student loans. The benefit of a fixed rate is consistency and peace of mind. The payments are typically higher on average. But they're also guaranteed to be the same each month. Variable rates may offer some long-term savings, but market fluctuations can make it difficult to budget accurately.
In either case, the interest rates of government-issued student loans are almost always lower than what banks or other private lenders will offer.
Student loan borrowers can take advantage of a tax credit offered by the Canada Revenue Agency, which allows for claiming student loan interest paid over the previous fiscal year on their annual tax return. Borrowers may even carry interest forward if they have no tax payable on the current year's return and apply it on a subsequent tax return for any of the next five years.
This is only applicable for government-issued student loans. Similar deductions are not available if they are paid off with a personal loan.
Many government-issued student loans offer flexible repayment options to accommodate borrowers struggling to make payments. These can range from reducing monthly payments to extending the loan repayment term. Some borrowers may even qualify for a repayment assistance plan which offers partial loan forgiveness for low-income earners. Moreover, students planning on returning to school may defer their loan existing student loan payments until they graduate.
Few, if any, personal loans rarely have built-in options to assist borrowers experiencing financial hardship.
Although personal loans do not require any collateral, lenders will typically limit the loan amount and require the applicant has good credit and full-time employment to qualify. Recent graduates face several obstacles which may make it difficult to secure a reasonable interest rate or loan sufficient to completely consolidate their debt. These obstacles include the value of any outstanding debts (including student loans), the likelihood they're earning an entry-level salary and a general lack of credit history.
Debt is undesirable — even at the best of times. However, when compared to their alternatives, student loans offer a degree of flexibility and cost efficiency that is difficult to find elsewhere. Anyone considering paying off their student loans with a personal loan, may want to evaluate any benefits they may be losing.
If personal loans, lines of credit and / or credit card debt are making it difficult to keep up with your student loans, a Life-Changing Debt Solution may be the answer. Contact a Licensed Insolvency Trustee for a Free Confidential Consultation to learn your options and for help choosing the one that's right for you. While government-issued student loans cannot be included in a bankruptcy or Consumer Proposal for the first seven years after graduation — defeating your consumer debts will be a significant step toward the financial fresh start you deserve.
CIRP, LIT
Senior Vice President
Servicing: Dartmouth (Venture Run), Bridgewater, Digby, Liverpool, Yarmouth, Windsor (NS), Middleton
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