Worry over tuition and living expenses is disquieting almost half of post-secondary students as they return back to school. They are also anxious they will not be able to repay their debt once they graduate because they are concerned about finding permanent, full-time work, a poll issued by CIBC shows.
Nearly two million Canadians rely on debt to finance education, meaning the full impact of high tuition fees is delayed until after graduation - when it is then compounded by interest. According to the Canadian Federation of Students the average student debt load is over $25,000. This debt includes federal and provincial government loans, and personal debt in the form of credit cards, family loans, and lines of credit.
So when do you have to start paying the money back? If you have a Canada Student Loan, repayment is required six months after you stop being a full-time student. You will not have to make a payment during the six months, but interest accrues at a floating rate of prime + 2.5%. (In some provinces such as Alberta and Ontario, interest does not accrue on the provincial portion of your loans during the six-month grace period.)
Before your first payment, you must to decide whether to pay back the grace period interest or roll it in with your loan (convert it to principal). You also have an opportunity at that time to increase your monthly payment over and above the minimum amount, and to select either a fixed interest rate (prime + 5%) or a "floating" (variable) interest rate (prime + 2.5%). The interest portion of each monthly payment is calculated using simple interest based on the exact number of days between payments.
You can build a good credit rating by showing your ability to address your loan in a responsible way. One of the best ways to manage your student loan is to pay it off as quickly as possible. The faster you repay, the higher your monthly loan payments, but the lower your overall interest. You can also make lump sum payments to reduce the principal at any time.
What happens if you default? If you are behind on your monthly payments, interest will continue to accumulate on the unpaid balance, and you could be reported to a credit bureau, which could affect your ability to get credit (such as a car loan, a mortgage or a credit card). It could also impact your capacity to rent an apartment or get a job.
Questions
1. Amy's Canada Student Loans totalled $8500 when she graduated from Georgian College. Her six monthgrace period ended on June 30 and her first monthly loan payment for $160 was due on July 31. By then, she had saved up enough money from her new job to pay all the interest that had accrued during the six-month grace period. Amy chose the fixed interest rate option (prime plus 5%) when the prime rate was 4.5%.
(a) Calculate the amount of interest that had accrued (at prime plus 2.5%) during the grace period.
(b) Prepare a three-month loan repayment schedule. Also calculate the total interest paid for the first 3 regular payments and the overall balance owed.
2. Hamilton accumulated $12,000 in Canada Student Loans when he completed his Engineering program at Royal Roads on April 22. When it was time to start paying back his loan, he chose to include the grace period interest with his loan balance and he selected the floating rate interest option. In addition to making monthly payments of $200 he made a $400 lump sum payment, directly to the principal, on January 31. Initially prime was 3.75% but it rose by 0.25% effective August 11 and by another 0.25% on January 12. Prepare a loan repayment schedule up to and including the January 31 payments.