Figuring out how to pay for post-secondary education or dealing with student debt after graduation is becoming more commonplace. But you don’t have to damage your finances forever in order to pay for an education. We walk you through how student loans work – from borrowing while in school, to repaying once you graduate, to refinancing your loans down the road.
While government student loans, also known as Canada Student Loans, come with many different benefits, some students still opt to choose private lenders or decide to go with both government and private loans. Find out about the key differences in the table below:
When does interest kick in?
Interest is not paid until you graduate or leave post-secondary education, or until you reach your lifetime limit for assistance.
Immediately. Interest will accrue from the moment you take out your loan.
How soon do I have to start paying the loan back?
Six months after graduating or leaving post-secondary education or if you leave school for six months or longer or switch to part-time studies.
Immediately. Repayments will begin as soon as you take out your loan.
Usually this is not required.
This may be required.
What help is available if I can’t afford my repayments?
Some forms of repayment assistance are available including temporary relief on paying interest, reduced or no monthly repayments or loan forgiveness.
Help will vary between different lenders. You may be able to seek some assistance, however it will likely be difficult.
What is the Canada Student Loans interest rate?
As of December 2019, you have two interest rates to choose from:
The floating interest rate is: prime
The fixed interest rate is: prime rate + 2%
* For Canada Student Loans issued before 1 August, 1995, the interest rate is: 3.125%
All student loans have a floating interest rate by default. You can change to a fixed-rate once you enter repayment on your student loans, but it’s important to note that you can’t change back to a floating rate.
You have three options when you’re looking for a loan to pay for school: government loans, provincial/territorial loans or private loans.
Federal loans. These are federal government loans offered through the Canada Student Loan Program (CSLP). They come with fixed or variable interest rates tied to the prime rate.
Provincial/territorial loans. Provincial/territorial loans are specific to each province or territory, and interest rates vary. Some provinces offer interest-free loans while others charge the prime rate plus a percentage.
Private loans. Private funding through bank loans or alternative lenders is available to students who aren’t able to qualify for the full amount they need through government funding. In most circumstances, these loans come with higher interest rates than federal and provincial loans.
Typically, both private and government lenders recommend that students apply for government loans first, since they offer more favourable repayment options while you’re in post-secondary education. However, there’s a limit to how long you can receive government funding for, as well as how much you can access – and how you can use it.
You might benefit from private student loans if you…
Have good to excellent credit
Are enrolled in school full-time
Reached your limit for federal and provincial/territorial loans
Government student loans might not be able to cover all of the costs associated with your education. You might want to look into borrowing from private lenders to pick up where your government loans fall short.
You might want to look into both government and private financing if you…
Have good to excellent credit
Need to finance a study abroad semester
Almost reached your limit for government loans
It’s possible you might benefit from government loans before you turn to private lenders. But it’s also possible they won’t cover all of your expenses, especially living expenses such as residence fees and meal plans. Consider talking with your school’s financial aid office to set up a meeting to discuss your next step.
Consider federal and provincial/territorial loans or other financial aid if you…
Have bad or no credit
Are enrolled in school part-time
Haven’t reached your limit for government loans
You might find it difficult to qualify for a private student loan. Government student loans and other forms of financial aid, like scholarships and grants, might be a better option for your particular situation.
How government and private student loans work
Government student loans generally attract lower interest rates than private student loans, but there’s a limit to how long you can borrow money for and what you can use it for. Students typically turn to private student loans after they’ve maxed out their government loans.
Here’s how government loans stack up against private loans:
Government student loans
Private student loans
Education-related expenses directly related to school.
Education-related expenses, including some other costs closely related with education.
Who it’s best for
Any eligible student.
Students who’ve already used up their government loans, can’t qualify for government loans or need funding for other expenses.
Be a Canadian citizen or a permanent resident with a valid Canadian address
Live in a province or territory that operates with Canada Student Loans (Quebec, NorthWest Territories and Nunavut offer their own student loan programs)
Be enrolled in at least 60% of a full course load (or 40% for those with a disability)
Be enrolled in 20-59% of a full course load if you’re a part-time student
Be enrolled in a degree, diploma or certificate program offered by a designated college or university that runs for at least 12 weeks within a 15 week period
Pass a credit check if you are over the age of 22
Have not exhausted your maximum lifetime limit for government loans
You or your cosigner must:
Be a Canadian citizen or permanent resident with a valid Canadian address
Have proof of an income
Have good credit
Have a low debt-to-income ratio
Have no previous student loan defaults
Be at least 18 years of age, or the age of majority in your province or territory
The floating interest rate is: prime
The fixed interest rate is: prime rate + 2%
* For Canada Student Loans issued before 1 August, 1995, the interest rate is: 3.125%
Varies between lenders, but some lenders will charge prime minus 0.25%.
Not required for most government loans.
Required for students who are younger than 18 and don’t meet the lender’s credit, income or legal residency requirements.
Full-time students who received loans on or after 1 August 1995 are eligible to receive student financial assistance for no more than 340 weeks.
Full-time students enrolled in doctoral studies are eligible to receive student financial assistance for no more than 400 weeks.
Varies by lender, though many let you borrow up to 100% of your school’s tuition and fees.
How do I find a competitive private student loan?
Ask yourself the following six questions when comparing private student loan options:
As a student, chances are that your credit history isn’t more than a few years old – if you have one at all. Have an idea of your credit score range and other financial details when looking for a private student loan by yourself. Otherwise, ask a loved one to cosign for better chances of approval and affordable terms and rates.
Some private lenders advertise caps for undergraduate and graduate borrowing, while others might not offer loans in the exact amount you need. It can be tempting to over-borrow to have extra cash on hand, but remember: the larger your loan amount, the more you’ll ultimately pay in interest.
The annual percentage rate – an expression of your loan’s interest and fees as a percentage – is the best way to tell which loan is least expensive. For the most accurate comparison, make sure you’re comparing loans with similar repayment terms.
Look for a term that isn’t too long, or you could end up paying an enormous amount of interest. Too short, and you could end up with unaffordable repayments each month.
How much you’ll pay monthly is determined by your loan amount, APR and loan term. Estimate how much you can expect to earn after you graduate, and look for a loan that offers repayment options you think you’ll actually be able to afford, even if you don’t make as much as you expect.
Most students don’t have much disposable cash while they’re in school. If you can, find a loan that allows you to hold off on repayments until after you leave school – or at least allows you to make interest-only repayments.
What's a cosigner and do I need one?
A cosigner is another individual – usually a parent or relative – who signs your loan documents with you. Cosigners essentially act to reassure the lender that it’ll get its repayments on time.
Many lenders recommend, or sometimes require, that undergraduate borrowers apply with a cosigner. But you might want to consider a cosigner even if it isn’t required. That’s because most lenders have minimum credit requirements that most post-secondary students can’t meet – usually a minimum credit score of at least 650 and a debt-to-income ratio below 43%.
While the application process can vary between lenders, many follow a similar process. Before you start your application, make sure you have all of the documents you need on hand.
Common documents needed include:
Proof of attendance at your school (such as an admissions letter)
A letter detailing your financial aid award from your school (if any)
Applications also vary depending on how they treat cosigners. Depending on your lender, you might have to fill out your application with your cosigner, or they might have separate applications to themselves. Some lenders even require borrowers to meet credit requirements themselves and only allow cosigners to help them qualify for more competitive interest rates.
After your finish your application, make sure to read it over before hitting submit – making a mistake is an easy way to get rejected.
Alternative ways to pay for school
Student loans aren’t the only way to pay for post-secondary education. If you’re not certain you want to take on a student loan, look into the following financial aid alternatives.
Grants and scholarships. The federal government, provincial and territorial governments, schools and corporations offer grants and scholarships to students that you usually don’t have to repay. Grants are often based on need, meaning they’re available to students who can demonstrate financial hardship. Scholarships are usually merit-based, awarded for high grades or for doing well in a specific field like sports or art. Outside of need and merit, you can find both scholarships and grants for members of underrepresented groups and specific career paths. Since it’s rare for grants or scholarships to cover your full tuition, they’re most often used in combination with other financial aid.
Part-time job or side gigs. You likely can’t cover the cost of tuition with most part-time jobs. However, you might be able to cover part of your housing, textbooks and spending money. Bonus points if you find a job in your field to get a head start on your career. Don’t have time for that kind of commitment? Take on small side gigs when you have the time, like acting as an usher at live performances or working a stall at a local market. These gigs might not always cover your entire rent, but they can keep more money in your pocket.
Personal loans. You can use a personal loan to pay for post-secondary education, although you might not want to foot the entire bill with one. Personal loans are typically better for covering extra costs like flying back home for the summer, relocating for an internship and similar expenses that come with being in school. You can typically borrow between $2,000 and $35,000 with rates that compare to private student loans. However, you often need good credit to qualify, and cosigners aren’t always allowed. Repayments also start immediately.
Student loan refinancing involves taking out a private loan with lower interest rates or more favourable terms to wipe out your current debt. Then, you can begin making repayments on your new loan with a clean slate.
Your ability to secure a better interest rate and term on your new loan will depend on your creditworthiness and financial history. Factors that lenders will typically consider when processing your eligibility for a new loan can include your credit score, income, job history and educational background.
Benefits of refinancing
By finding a new loan with more competitive rates and terms, refinancing can help you save money now and in the future.
Lower interest rates. You may be able to negotiate lower interest rates on your loan if you refinance it through a private lender.
Longer terms. With the right refinancing loan, you may find it easier to extend your terms for repayment and secure lower minimum monthly payments.
Easy payments. Refinancing loans can be used to consolidate several loans into one easy and affordable payment to help you better manage your debt load.
Improved credit rating. If you have a negative credit report, refinancing can help you get back on track and repair your bad credit.
How to apply for refinancing
Applying for student loan refinancing is usually less complicated than applying for a student loan. Before applying, you’ll need to make sure you meet the eligibility requirements for the loan.
Good to excellent credit. You’ll usually need to have a credit score that sits above 650 to qualify for better terms on your loan.
Steady income. Many lenders require you to have a steady income and be gainfully employed over a long period.
Credit history. You’ll usually need to have a decent amount of credit history under your belt to demonstrate that you’re capable of paying back loans on time.
You may be asked to supply some of the following documentation when you apply for a loan. From there, you’ll usually have to wait for your new lender to coordinate with your current lenders to refinance the debt.
Government-issued ID. You’ll have to show proof of ID like your driver’s license or passport.
Proof of income. You’ll be required to submit documents like pay stubs and letters of employment to verify how much money you make.
Loan statements. You may need to provide a recent loan statement showing how much you currently owe on your student debt. This should also list your current provider’s contact info.
Payoff letter. Some lenders might require you to get a payoff letter or written statement from your current lender stating how much you’ll owe on your loans in 30 days.
When it’s best to refinance student loans
You have good credit. You can usually get lower interest rates on private loans if your credit score is over 650. Apply to get your credit score with credit bureaus like Equifax and TransUnion.
Your income exceeds the amount you owe. You’ll typically get better rates if you have a low debt-to-income ratio because it shows that you have enough income to make repayments.
You don’t have government-issued student loans. If you funded your post-secondary education through private loans, it’s often easier to negotiate better rates.
You have a job and a steady source of income. You’re more likely to be approved for better terms if you can show that you have a steady stream of money coming in to meet your minimum payments.
Can I refinance my government loans?
You can, but it might not be the best idea. When you refinance your government loans with a private lender, you give up several key benefits that include tax deductions, flexible terms, term extensions and income-driven repayment plans.
Government loans also generally come with some of the lowest interest rates out there for student financing. Chances are, you might not be able to find a better deal with refinancing.
What happens after you take out your student loan depends on the type of student loan you have.
Your loan will be deposited into your bank account and must be used to pay for your tuition and fees.
With a government loan, you’ll be required to start paying it back six months after you graduate or leave post-secondary education. If you leave school for more than six months or transfer to part-time studies, you’ll also have to start repaying your loan.
As of August 2018, students who make under $25,000 a year are not required to pay back their student loans until they earn a higher annual salary.
Your loan will be deposited into your bank account and must be used to pay for your tuition and fees. You might need to repay your student loans immediately, make interest-only repayments or defer your loan until after you graduate. This will depend on the lender and the loan.
If you can’t make your loan repayments to Canada Student Loans, the following repayment assistance may be beneficial to you:
Through the Repayment Assistance Plan (RAP), you may qualify for a reduced monthly repayment or no monthly repayment at all.
If you have a severe permanent disability, you may be eligible to have your loans forgiven through the Severe Permanent Disability Benefit.
As of August 2018, any graduate who earns less than $25,000 annually will not have to pay back student loans until they earn more than this yearly amount.
Under the Revision of Terms measure, you can ask to have your student loan repayments decreased if you are unable to repay them. Alternatively, you can ask to have your repayments increased if you wish to pay off your debt faster.
If your Canada Student Loan is in collections, Canada Student Loan Rehabilitation may be able to help you out.
You may be eligible for Canada Student Loan Forgiveness for Family Doctors and Nurses if you are working as a family doctor, family medicine resident, nurse or nurse practitioner in an under-served rural or remote community. You’ll need to reach out to the Canada Student Loans department in order to find out more.
Other repayment options
Life happens. You might discover that you’re unable to make repayments on your loan, however there may be options available to you.
Some of the options you might come across for repayments include:
Forbearance. If you lose your income or simply want to return to school, you might be able to pause your student loan repayments. How long and often you can go into forbearance depends on your loan and lender, but expect interest to continue adding up.
Deferment. Like forbearance, you can apply to pause your repayments for a legitimate reason. But your interest doesn’t accumulate while you’re in deferment. Some private lenders refer to a loan’s six-month grace period as deferment but don’t offer it after you’ve started making repayments.
Cosigner release. You can release your cosigner from most student loans after consistent on-time repayments for a specific time, usually a few years. After your cosigner is released, you’ll be fully responsible for your debt.
Consolidation. You can consolidate your debt at any time. But you’ll want to make sure it’s more affordable than what you’re currently paying. With consolidation, you take out a new loan, preferably with more favourable interest rates and terms, to pay off your student debt. You then repay your new loan with one monthly payment. Keep in mind you will lose any government benefits if you consolidate your Canada Student Loans.
Refinancing deals with paying off one single loan with a new loan to get a lower interest rate or better terms, while debt consolidation involves combining multiple loan types into one affordable and easy-to-manage payment, in addition to refinancing for better terms.
It depends on the type of student loan you have. Generally, only government loans offer deferral, which you give up if you refinance your student loan with a private lender.
Since most undergraduate students don’t have a credit score yet, it’s common for a cosigner – such as your parents – to sign on with you for financing. As long as you meet the eligibility requirements, you could be approved for a loan – with or without credit.
You can if you meet your lender’s credit requirements. Generally, you’ll need to have good credit and a certain salary if you apply without a cosigner, which is something most undergraduate students unfortunately don’t have.
Refinancing a student loan can actually improve your credit in the long run by adjusting your monthly repayments to something you’re more likely to afford. However, it may damage your credit slightly in the short run because most lenders conduct a hard pull on your credit report during inquiry for the application process, which causes your score to temporarily dip about 5 points.
Emma Balmforth is a Producer at Finder. She is passionate about cryptocurrency, credit cards and loans, and enjoys helping people understand the often confusing world of finance. Emma has a degree in business and psychology from the University of Waterloo. She wants to help people make financial decisions that will benefit them now and in the future.
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