Many college graduates take on a hefty amount of debt to pay for their education, figuring that it is a worthwhile investment in their future — which it can be. Repaying student loan debt, however, isn’t always as easy as it might have seemed when you first made the decision to finance your education. If you are considering other ways of paying off your debt like taking out lower-interest loans to pay it off and then repaying the lower-interest line, you should give it some thorough consideration.
Most interest rates for government-backed student loans are about 5% per year in Alberta. There are also other lower-interest rate loans that many students may be eligible for. But those other loans will have students giving up the tax credits that the governments in Toronto and other areas allow. And if you pay off your student loan you may also risk that at some point the government might decide to pardon many student loan debts. That could leave those who have paid off their loans Winnipeg via other methods, like a lower-interest loan, without any recourse.
If you do take on another line of credit, even if it is at a lower rate, then you will not be able to write the interest off on your taxes. When most loans around Canada are resting at about 4%Â that seems like a whole lot of hoops to jump through, and in the end it might not make much financial sense. There are many differences to consider in a student loan versus a line of credit. Which one is right for you depends on how much you owe, where you reside in Canada, and what you are willing to forego (like tax credits) or the risks about student forgiveness potential that you are willing to take.
More flexible
In general, student loans are far more flexible than other lines of credit. For instance, if you take out a student loan in Alberta that accumulates more than $6000, the government will give you a generous nine and a half years to repay. When you start your repayment, you will have a fixed amount due every month.
That amount will consist of principal and interest, but it will stay the same every month. If at some point you are having a hard time making payments, then the government will probably work more with you to help you out than a lending institution would. In some cases, they might even help you cover the cost of the interest as long as you continue to pay down your debt.
A line of credit can be variable, and there are no fixed repayment terms involved. The lower the payments that you make, the less you will be able to pay off the loan and the more the interest will accumulate, which might make you dig yourself a bigger hole. If you are having a hard time making your minimum payment, the banking institution is not likely to be sympathetic or willing to work with you to help get you over the hump.
Grace periods
For Alberta and Ontario student loans, once you graduate you have a six-month grace period before you have to start repayment. That allows you to get your financial feet on the ground instead of digging right in. However, this feature isn’t the same in British Columbia. The details of the various student debt programs depend on where you attend school and who supplies your student loan. The federal option will always give you a grace period, which means that even though you aren’t paying, you also aren’t accruing any interest — which is a huge advantage over a line of credit loan.
Even if the interest on a line of credit is lower, the small portion that you will save isn’t worth switching over. Not only do you not get the advantage of the tax break or the grace period if your loan is taken out in Ontario or Alberta, but you also don’t have an interest-free grace period. If at some time in the future, the line of credit loans go lower, then you might want to revaluate. But on the whole, it is much wiser to pay your student debt off with the repayment terms you agreed to and just hope that you will be able to increase your payments and pay it off more quickly, rather than robbing Peter to pay Paul.
