Student Loans 101
They can be a wise investment. Discover how to get the most out of them.
If you plan to apply for other loans after graduation, such as a car loan, or plan to sign a lease, you’re best to do it before finalizing your consolidation contract. Once your monthly student loan payments are listed on your credit report, it will be more difficult to obtain more credit. For this reason, Benedict urges borrowers to keep their scheduled loan payments low to avoid tapping out credit. You can make additional payments easily if you can afford more.
Once you have received your consolidation contract, educate yourself on the terms. Jara says that many new graduates simply don’t ask the right questions. “They want to know what the monthly payment will be but don’t ask about the interest.” Use a service like Credit Canada to determine whether you should choose a fixed or floating interest rate. The fixed rate is higher than the floating rate; the prime rate (recently 4.25 per cent) plus five per cent is the fixed rate; the floating rate is prime plus 2.5 per cent.
Avoid what the NSLSC calls a “revision of terms,” which allows borrowers to pay a smaller monthly payment by extending the period over which the loan will be paid back. Here’s why: if you have a $30,000 loan consolidated on a fixed rate of 9.25 per cent and want to pay it off in 10 years, you will have to make monthly payments of $384. Your total interest costs will be $16,091. Extending the repayment period to 15 years will bring your monthly payment down to $308, but the longer term also means that you will pay almost $10,000 more in interest.
If at first you have trouble paying back your student loan, you are not alone. Forty per cent of university students, 50 per cent of college students, and 65 per cent of private college students receive interest relief, are in arrears for four or more months, or outright default. The bumps are usually hit during the first two years after graduation.
Even if you don’t land a steady job after graduation, there are a number of ways to avoid default—and the corresponding black mark on your credit report. Benedict recommends applying for interest relief even if you are not sure if you qualify. Once you’ve maxed out interest relief, you may qualify for up to $26,000 worth of debt reduction, if you’ve been out of school for at least five years and face exceptional long-term financial hardship. Finally, make sure you have overdraft coverage on your bank account so you won’t bounce a loan payment if your rent cheque is cashed on the same day.
You can save a lot in interest costs if you do some basic arithmetic. Find out which of your loans has the highest interest rate. Pay it off first. Do you have significant savings? You’ll be further ahead if they are used to pay down loans. And if you qualify, consider rolling your student loan into a bank loan with a lower interest rate, such as a mortgage.
Even in your darkest loan repayment moments, remember that post-secondary education is a long-term investment. The rewards may not be instantaneous, but in the long run, most graduates find that the time and money were well spent.
Another thing you might want to consider is to specifically DENY the NSLP the right to access your bank account directly. Never, ever provide them with authorization to use your bank account. It means more work for you in that you have to write up post-dated cheques and the like, but it means a lot less hassle as screw-ups between NSLP departments like interest relief and payment don’t end up coming out of your bank account. If you’ve already provided them with that authority, you can write a letter and cc it to your bank politely requesting that this authority be cancelled.
I had one friend who had his automatic loan payment withdrawn three times in the same week, and while the NSLP acknowledged that it was a mistake and wouldn’t happen again they refused to give the money back, instead applying it directly to his principle. I suppose it probably helped him save money in interest in the long run, but probably not enough to pay for the stress it caused between him and his landlord.
Also, don’t be afraid of the revision in terms as the article suggests, so long as you can keep a committment to yourself to pay more than the minimum student loan payment before making any leisure purchases. That way, if times get a bit tougher, you don’t have to negotiate the revision in terms when the month or two delay that it imposes can cause serious problems in your cash flow. Now if you honestly aren’t able to keep that committment, then the article’s right. The extra interest you’ll have to pay for the reduction in payment really isn’t worth it. Consider it a last resort.