Student debt in Canada is at an all-time high. With Canadians owing over $15 billion in student loans, it’s only logical to take a step back and decide whether they’re worth taking out in the first place.
Student debt is hard to classify—it can be considered either good debt or bad debt, depending on how you look at it.
Getting an education can improve your financial future by increasing your earning potential exponentially, and therefore taking a loan to achieve that is, by definition, good debt.
On the other hand, though, a good percentage of people don’t reap the benefits of going to university for a number of reasons. In this case, taking a student loan will leave you with all of the debt and no increase in means, making it bad debt.
In this article, we’re going to make an in-depth analysis of the potential advantages and disadvantages of taking out student loans and help you decide whether or not they’re worth it.
Knowing what your goals are
The first thing you need to consider before taking out any kind of loan is your goals.
This is especially important with expensive, long-term loans like student loan.
Ask yourself why you’re making this decision. Are you passionate about what you plan on studying? Do you want to make a commitment to this field? Are you just going to university because that’s what you’re “supposed to do”? Will you still be interested in this in five years? What will you do once you have your degree?
You must answer these questions honestly, in order to avoid any regrets later on—whether personal or financial.
After you’ve answered these questions, the next step is to make a plan. Now, it’s impossible to plan out every single step of your life—trust me, I’ve tried—but it is possible to have detailed plans on how to achieve your goals, and honestly quite irresponsible not to.
You need to have an end goal for each stage (e.g., graduate, find a job, pay off student loans), and a plan to get to each goal. Some goals can run concurrently, while others have to wait a bit.
You need to figure out the difference, and unless you face major life changes or get an opportunity that is decidedly better than your current plan, you need to stick to the plan. This will keep you from flailing around, and keep you grounded and on the path to achieving your goals.
Potential benefits of taking out student loans
1. You have better job opportunities: When you get a degree, your employability level goes up. You are seen as better educated, and by extension, more skilled; and this puts you at a higher level on the job market than someone who hasn’t gone through a post-secondary program.
This will mean that you are eligible for job opportunities that both have better benefits, and pay better than jobs you would have qualified for before you got your degree.
2. They can help build your credit: Payment history makes up a good chunk of your credit score.
Since you’re probably going to spend a few years paying off the loans, these repayments can have a very positive impact on your credit worthiness.
Of course, this is only a benefit if you make your payments on time, as late payments will negatively impact your credit worthiness.
3. They can help you pursue your dreams: Everybody wants something out of life. Dreams are important; they give you direction.
However, the high cost of university tuition can sometimes be a barrier to achieving those dreams.
The average person can’t afford to pay tuition without some form of financial aid, so student loans are a blessing for people with actual goals that involve post-secondary education.
4. They offer lower rates: Student loans offer special terms and provisions such as lower rates, deferred payments, and best of all, a grace period after the end of your program, where your loan doesn’t accrue any interest at all.
These provisions are put in place as a measure to make sure that student loans achieve their intended goal of helping young people achieve their dreams.
5. They can be used for essentials other than tuition: While you can choose only to use your student loan funds to pay for tuition, lodgings, and feeding, you can also put the funds towards getting other things that are necessary for your education, such as stationery, a laptop or desktop, textbooks, and so on.
Now, this doesn’t mean you should spend the funds on luxury items; the key thing is to keep your expenses to a minimum while also getting things you actually need to make your life as a student easier.
Potential drawbacks of taking out student loans
1. They can be expensive: Other than the already high cost of tuition, you also have to pay back an interest in some cases. This can add up over time, and the longer your loan term, the more you’ll potentially end up paying.
Though student loans can have their advantages, it’s better to pay your tuition in full if you can afford it (although not many can).
2. You start your adult life off with debt: This can be a tough burden to bear. You’re placed under immediate pressure to find a job and make a plan to pay off the loans before they start to catch up to you.
It might take a few years to find a high enough paying job that you can have a comfortable lifestyle while paying off your debt.
3. Other life goals take a back seat: Student loans are expensive, as we’ve established. By extension, the monthly payments are also high. Every dollar you’re putting towards repaying your student loans is a dollar you could put towards saving for a new house or car, investing, or planning for your retirement.
A lot of people with substantially high loan amounts can’t even start pursuing long-term goals like this until after they’ve finished paying them off, slowing down their lives, and in the case of investments and retirement plans, bringing down their potential.
4. There are penalties for defaulting on loans: Delays and defaults in paying student loans can be quite detrimental, and often mean you have to pay a lot more than you originally owed.
Higher interest rates and extra fees can be added on when you don’t pay your student loans on time.
5. They can destroy your credit: As stated before, student loans can give a big boost to your creditworthiness because of the recurring payments.
If you don’t make the payments on time, however, your creditworthiness drops substantially.
The more late and missed payments you accumulate, the lower it goes, and eventually, you’re left with a low credit score that could haunt you for life.
Ways to avoid this include only taking out loans that you feel you will be able to pay back, and making a repayment plan as early as possible.
6. Bankruptcy won’t always free you from them: A lot of different types of debt (mortgage, medical bills, etc.) are forgiven if you declare bankruptcy.
Student loans, however, have a different set of rules. To protect itself from accumulating unpaid student debt, the Canadian Government created a rule that states that unpaid student debt will not be forgiven in the event of bankruptcy; unless it has been 7 or more years since the date of the last time the individual was a student.
Who is eligible to take out a student loan?
To qualify for student loans and grants in Canada, you have to meet the following criteria:
- Be a citizen: In order to qualify for Federal loans and grants, you must be a citizen or a permanent resident of Canada. Of course, there are funding opportunities for international students as well—we’ll get to that soon.
- Demonstrate financial need: You will need to show that you need financial aid before you’re considered eligible to receive student loans. What this means differs depending on the organization granting the loan. In some organizations, you just have to check a box and that’s it. In others, however, you may have to provide information such as your income and debt situation, which will then be compared to expected expenses, including tuition, and used to determine what kind of financial aid you will be granted if any. It is advisable to contact your lender and ask what their definition of financial need is.
- Course load: If you’re a full-time student, you’re expected to be enrolled in classes that add up to a minimum of 60% of a full course load, unless you have a permanent disability, in which case you need a minimum of 40%.For part-time students, the number of classes you need to be enrolled in is a minimum of 20% of a full course load, and a maximum of 59%; and a range of 20-39% for students living with permanent disabilities.
- Program duration: You must be enrolled in a degree, diploma, or certificate awarding program, with a total duration of at least 12 weeks, within a period of 15 consecutive weeks, at a designated post-secondary institution in order to be considered for financial aid.
- Credit: Students who are 22 years or older and applying for the first time need to pass a credit check in order to be considered for financial aid.
- Maximum lifetime limit: There is a maximum limit to the amount of financial aid that one individual can receive. Usually, the limit is 340 weeks, and 400 weeks for doctoral students.
- Academic performance: In order to keep receiving aid after you have been approved, you need to maintain a satisfactory academic standard.
Student loans for international students
The rules for international students seeking financial aid are different. Since as an international student, the IRCC (Immigration, Refugees and Citizenship Canada) expects you to be able to foot all your bills and finance your stay in the country, it can be tough to get government aid.
An international student is expected to have money for tuition, as well as an additional $10,000 for each year of study.
This requirement makes getting federal student aid practically impossible, meaning that most international students will have to seek aid from private institutions like BHM Financial and Fel Canada instead.
To get a student loan, international students often need a Canadian citizen with a good credit score to co-sign it. In recent times, though, more and more universities have begun to approve loans for international students without co-signers, and determine their eligibility through your previous academic success instead.
The loans will usually cover the full costs of attendance, and each lender will have its own eligibility criteria, meaning that you have to consider quite a few of them before making any commitments.
Other than international students, private lenders like the ones mentioned before are also a good option for aspiring Canadian students with bad credit. Their loans are tailored for individuals with all kinds of credit, and they can help build your credit over time.
However, private lenders also take higher interests than federal loans would, so you should start preparing to make your payments as soon as possible.
It is important to note, though, that as an international student, you should have exhausted all other options, such as personal finances, grants, and scholarships, before considering student loans.
Paying back your student loan
It can take some time to figure out just how much to pay in each monthly installment—your lender’s policies and your monthly budget can be a lot to consider—but once you’ve figured it out, it’s relatively easy to determine how long it will take you to pay the loans back.
With Federal loans, you have a grace period of 6 months during which you don’t have to make any payments and you aren’t charged any interest. However, there are no rules against making payments during this period; and if you can pay off all your loans during this time, you won’t have to pay any interest at all.
If you don’t pay your loan back during this time, you will have to make the following choices regarding your loan repayment:
- Your interest rate: You’ll need to choose between a floating interest equal to the prime rate and a fixed interest of the current prime rate + 2%.
- Payment frequency
- Which day of the monthly payments are deducted;
- Bank account payments are withdrawn from.
International students will usually be required to start making their payments (at a subsidized rate) during the course of their program, and monthly payments will increase after the program is completed.
Is it worth taking a student loan?
The only answer I can give you is; it depends. It depends on your goals, your situation (both personal and financial), and the answers to a lot of questions that you have to ask yourself.
Hopefully, this article helped you answer a few and at least pointed you in the right direction.