On March 19th, the federal Liberal government published their pre-election budget. There were a number of financial items of interest, but one that really affects Gen Z and Millennials flew under the radar. That is, the interest rate on Canada Student Loans is decreasing dramatically!
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What’s New?
The major banks set their prime lending rate based on the Bank of Canada. Currently (April 2019) the prime rate is 3.95%. Your loan rate is expressed as prime plus some percent. If you have a variable rate loan, the interest rate you pay goes up and down as the prime rate goes up and down. Up to now, the Canada Student Loan rate for variable loans was prime+2.5%, which is currently 6.45%. That has now gone down to simply the prime rate: 3.95%.
Fixed rate loans are set as the prime rate plus some premium, and they stay the same over the whole life of the loan. This is good if you need to be sure exactly what your payment will be each month, but you do typically pay a penalty for that in terms of a higher interest rate. Until now, the government’s rate for Canada Student Loans for fixed loans was prime+5.0%, or 8.95%. But now, they’ve reduced it to prime+2.0%, or 5.95%.
In addition, Canada Student Loans have a 6-month grace period after leaving school before you start to repay them. And the new plan is to make that grace period interest-free. That is, you won’t have to start paying it back AND it won’t be accumulating interest owed.
What does this Mean for You?
If you have a Canada Student Loan of $30,000, and plan to repay it over 10 years (that’s 120 monthly payments), on a variable rate loan you would have paid about $340 per month. Now you’ll pay only $303! That’s a savings of over $4,400 in interest over those 10 years. Woohoo!
If you prefer a fixed rate loan, let’s look at that. Still $30,000 loan, still 10 years to repay it. You would have been paying about $380 per month, but with the new lower interest rates you’re now you’re paying $332 per month. You’ll save over $5,600 in interest over 10 years.
How to Decrease your Canada Student Loans Costs even More
Can you believe that decreasing your interest rate by 2.5% or 3% makes such a difference? You’re saving thousands of dollars over your 10 year loan!
Want to save even more?
Pretend the interest rate didn’t go down, and pay the old monthly payment. So for our variable rate example, continue paying $340 per month instead of $303. You know that extra $37 will just get frittered away into who-knows-what anyways! If you do that, then you’ll have your loan paid off in 8 years and 9 months. That’s 15 months early! And you’ll save nearly $850 in interest, on top of the $4,400 you already saved.
Prefer a fixed rate loan? You can save too, by continuing to pay the old monthly payment of $380 per month. You pay off your loan in 8 years 5 months, and save an additional $1,700 in interest!
On top of that, if your loan allows for extra payments without incurring a penalty, put your income tax refund toward your student loans and knock off even more time and interest expense.
Provincial and Territorial Loans
Note that the interest rate rebates are only for the Canada Student Loan portion of your loans. You may also have loans from your provincial or territorial government. Those rates are unchanged by this new announcement.
In general, you apply for student loans in the province that you live in at the time of applying, not the province where you go to school. If you grew up in Toronto and your parents still live there, but you go to school in Vancouver – your student loans are from Ontario, not British Columbia.
The Absolute Best Way to Save Money on Student Loans
The best way to save money on student loans isn’t by the government decreasing their interest rates, nor is it by bumping up your payments each month.
The best way to save money on student loans is to avoid them in the first place.
My Gen Z friends, please don’t get yourself into a giant hole of debt that you carry for the next 10 years! Find out about scholarships and grants to get money that you don’t have to repay. Study a little harder to boost your entrance scholarship from $500 per year to $1,000 per year, and cut $2,000 out of your need for student loans. Spend a weekend applying to various scholarships and awards and cut even more.
Use your RESP funds wisely, if your family was able to set up an account for you. Withdraw the funds in a way that minimizes any income tax you might have to pay on the grant and income portion of the RESP.
Talk to your professors about getting a job in your field, they must have contacts who need good, keen workers. Or just get a job at the local mall. Working 10 hours per week at $14 per hour will earn you nearly $30,000 over your 4-year degree. And with 4 months off over the summer, you can really get the earnings ramped up. Just remember to apply during reading week in February, and don’t leave it until after April exams. All the good spots will be gone.
Try to live within a modest budget, so you don’t need to use all your student loans. Just because they are willing to give you $8,000 per year doesn’t mean you have to spend it all! Watch for an upcoming post on budgeting to help with this.
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