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  • 3 Student Loan Tips for Recent Graduates

    3 Student Loan Tips for Recent Graduates

    Karina Arancibia

    Post secondary education, whether it's college or university, comes with a price tag. Students have to figure out a way to pay for their tuition, and for most people this involves taking out student loans. According to the Canada Student Loans Program, 2013-2014 graduates from four-year university programs carried an average of $34,000 in student debt in a mix of federal, provincial, and private loans.

    Student debt aftermath

    Let's say you're a graduate with a degree, but you've also got the debt that often goes along with it—now what? Figuring out how you're going to manage your new student loan bills and still live the sort of life you'd like requires planning. In this blog, we'll look at some of the considerations that should go into that planning, including loan consolidation.

    What is loan consolidation?

    If you are dealing with student loan debt you've probably come across the term "loan consolidation" in your Google search. Consolidation, at a basic level, means bringing multiple things together into one. For loans, this means taking multiple loans with different interest rates—and often from different sources—and rolling them into one loan. During this process, a new interest rate and new terms are negotiated. The benefit of this process is that it may lower the interest rate you are currently paying, it may lower your monthly payment, and/or give you more time to pay off your loans.

    Below are some tips to consider when evaluating the overall loan consolidation process and how to best approach your student loan.

    Weigh your options when addressing student loans

    At first glance, it might seem like loan consolidation (or debt consolidation) is the most logical answer when dealing with multiple payments and creditors. Who wouldn't want to make one payment a month rather than multiple? It's less to keep track of, right? As counter-intuitive as it sounds, the downside to putting all your loans or debts in one place is the fact that you're putting them in one place. There are some benefits to having student loan debt that are lost when that debt is involved in loan consolidation.

    Know the benefits of having student loan debt

    1. Tax Deductions

    Once you've consolidated a student loan, it no longer retains that special "student loan" status—it becomes a regular loan like anything else. Loans, by their very nature, generate interest, but student loan interest is something you may be able to file as a deduction on your personal income tax. You can't do that with normal loan interest.

    2. Federal Assistance Programs

    The second potential drawback to consider is the loss of access to some federal assistance programs related to student loans. Based on certain eligibility factors (like residence, income, and disability status), you may qualify for student loan relief, which isn't available for other normal loans.

    3. Lower Interest

    In some cases, the interest rate on your student loan could actually be lower than the interest rate you would pay on a consolidation loan, depending on your credit rating and credit score. In that case, it wouldn't make any sense to get a consolidation loan to pay off your student loan. 

    Right now, students can choose between a fixed interest rate on their student loan of prime plus 5% — the current prime rate is 3.95%, so the total fixed interest rate works out to 8.95% — or a variable or "floating" interest rate that can fluctuate. Canada Student Loans’ current variable rate is prime plus 2.5%. So if the prime rate is 3.95% that means the total variable interest rate on Canadian student loans is 6.45%.

    The good news is the government announced in 2019 it would be lowering the "floating" or variable interest rate by 2.5% by changing floating rates to the prime rate, which will save the average borrower approximately $2,000 over the life of their loan.

    You need good credit for a consolidation loan

    If you're considering loan consolidation, it's in your best interest to boost your overall credit score as much as possible. Like other financial transactions, you're about to enter into a new set of loan terms based on your creditworthiness. When lenders evaluate you for loan consolidation, they're going to look at your overall credit picture to decide what sort of lending risk you pose, and depending on that risk, they are going to set an interest rate on your loan. (The greater the risk you pose, the higher the interest rate.) This means that bad credit will likely play a determining factor in the terms of your new loan, including the interest rate.

    Take the time to review your Equifax and TransUnion credit reports to make sure they're as accurate as possible. While you can't immediately change your student loan situation, you can work to make sure the records are accurate and are not weighed down by anything that shouldn't be there. Evaluate the contents of your report and work to dispute/question anything that seems wrong (such as fraud or inaccurately reported late payments). Having a good and accurate credit report is always important, but is especially relevant when new loan consolidation rates and terms are determined based on that information.

    Don't have your credit report, or want to look it over with a credit expert? You can book a free Credit Building Counselling session with one of our certified Credit Counsellors and they'll pull your report, get your score and give you tips on how to build your credit and improve your score. Call  1.800.267.2272 to book. 

    Make sure you are paying less interest 

    Consolidating your loans and debt can result in a lower overall interest rate, which gives you more bang for your literal buck. Think of it like this: The higher the interest rate is on a loan, the more interest it generates which YOU will have to pay. If you can get a consolidation loan that lowers the amount of interest you are currently paying on your individual loans and debts, essentially, you could be making the exact same payments you are making now, but more of that money will go towards paying down the debt (or principle) rather than going towards paying the interest. That means you will be debt-free faster without having to change anything on your end.

    Contact Credit Canada if you have questions about debt

    Student loans are a fact of life for tens of thousands of Canadians—take the time to figure out how you'd like to address yours. You'll find that while having a plan doesn't change the numbers on the paper, it’ll go a long way towards making you feel better about them. Learn more about how to successfully manage your student loan debt, and any other debts you might have by giving us a call at 1.800.267.2272. All of our counselling is free, and our Counsellors can build you a customized budget that can help you pay off your student loan and save money. 

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    Topics: Student Loans

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