Three questions to ask before taking out student loans

2022-09-06   minute read

Melanie Fuller

Lifestyle Debt

If you play your cards right, pursuing higher education can become one of the smartest financial decisions you make over your lifetime. Many consider it as an “investment in yourself.” All investments require some upfront costs that produce payoffs over time.

If you’re considering taking out student loans or securing financing for your education, there are certain questions you need to ask yourself, and perhaps your loan provider as well, before you jump in.

Student getting loan letter of approval

Should you go with a variable or fixed rate of interest?

All student loans in Canada have a provincial and a federal component, paid for in a single payment. Interest rates can vary by province for that portion of your loan, but interest rates on the federal portion are always equal to Canada’s prime rate for variable, or the prime rate plus an added two percent for fixed.

In the recent era of aggressive interest rate hikes in Canada, some borrowers may shy away from anything with the word “variable” on it. But the fixed rate will always start at a higher point, the benefit it provides is cost certainty and peace of mind — you know what your monthly payment will be.

Getting a fixed or variable rate on your student loans is a personal decision; it depends on your personal circumstances and your appetite for risk. Do your research and ask your loan provider, or someone who understands the system well, for guidance based on your circumstances.

What is your contingency plan if you earn less than you expected after graduating?

Most post-secondary students carry an optimism and excitement about the future, as they should. However, you should always have contingency plans in case your career doesn’t start at the salary, or in the time frame, you hoped for.

Most provincial and federal student loans provide a six-month grace period between graduation and the first required payment. You have a little time to secure that job before the payments begin, if you need it. You can of course choose to start paying sooner.

Many student loans have flexible terms for repayment, allowing you to stretch the duration of the loan with a lower monthly payment, or condense the loan with larger payments so you can get out of debt faster. Note that extending the term can provide short-term relief, but means you will pay more interest over time.

You can also factor the government’s Repayment Assistance Plan (RAP) into your contingencies for if you experience financial difficulty. You need to apply and qualify for RAP, and if you do, it will gradually reduce the amount you owe within 15 years.

What other options exist aside from student loans?

It’s always a good idea to avoid taking on more debt than you need to, especially if other options exist. Canada Student Grants provide government financial assistance that does not need to be repaid. Private or charitable scholarships also exist, many of which go unclaimed or underused each year simply due to a shortage of applicants.

If you’re a parent and you want to reduce the need for your children to rely on student debt, Canada offers tax-advantaged ways to save for future education, such as Registered Education Savings Plans.

Make yourself aware of debt-free options to pay for school. Don’t underestimate the benefit of a paid internship, part-time work while in school, or summer jobs.

None of the above options is likely to eliminate your need for student loans completely, but as you make decisions that enable you to incur less student debt, you’re setting yourself up for future success and financial freedom.

Take the smart approach

Like all debt, student loans can be a source of serious stress. Be smart about how much you take on, pay more than the minimum each month if you’re able, and set time-bound goals to become debt free.

If you’re a young person, student loans may signify the biggest financial commitment you’ve made in your life so far, and it deserves serious thought. Don’t just sign the papers that are put in front of you, always read and understand the terms. The last situation you want is thinking you’re making progress, and then checking the numbers and seeing you’ve paid more, or made less progress, than you thought.

MNP can help

If your student loans are creating, or contributing to, a debt load that feels unsustainable, it’s time to reach out for help. You have options to get financial relief and start a new chapter. Contact us for a free, no-obligation, confidential consultation to find a Life-Changing Debt Solution that fits your unique situation.

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