Friday, October 27, 2006

Canadian Student Loans (OSAP) Part 2

I couldn't hold out long, Ive got to get back to my favorite topic...STUDENT LOANS.

For this second installment, I'm going to address the scam that is "The Grace Period".
For those of you still in college/university, or for those about to start, you should find this valuable. When I graduated from university two years ago, I called the student loan center to inquire about what I needed to do to arrange repayment. I was told that all students received a 6 month grace period before repayment. "Fantastic", I thought. I could focus on getting a job and not worry about repayment. Besides, I was moving back to Toronto. I had things like first and last months rent, work clothes etc to worry about.

Fast forward to November. I've landed a job and Ive started to stash money away for a house and for my good friend student loan. Sure enough, I receive forms in the mail so that I can arrange for my monthly payments to be taken out of my bank account. I receive 4 of these forms to fill out and send back in. You see, while I was in school, the government couldn't make up their mind on who was going to fund student loans and how they would be administered, but I'll save that story for a later post.

So I look at these forms that are sent to me. The form outlines what you owe, what the minimum payment is, how many months it will take you to pay off your loan at the min payment etc.. But there was one line I didn't understand, "Capitalized Interest". Between all 4 forms this amount exceeded $1200. I called to find out. I was told that this was the interest that was adding up over the last six months. I questioned: "but what about the grace period I was told about". Response:" Sir, during the grace period you don't have to make any payments, but you still owe for interest".

I WAS FURIOUS!!!! I tried to be proactive about my loans, I wanted to start paying back sooner. I didn't have $1200 extra to be handing to the bank. WHAT A SCAM!!!! There was nothing I could do. I just had to suck it up.

Fast forward to 4 months ago. My fiance is graduating from school and already has a job lined up. She will be starting the second she is done. I tell her about what I went through and to start paying back your loans immediately. So I call the student loan center on her behalf (She had to log in and then hand the phone off once she was speaking to one of the administrators). I tell the person on the other end that my fiance would like to start paying back immediately. I have our banking information ready and would like to set up recurring withdrawals.

Her response: "Sir, you realize your fiance is in her grace period".
I'm upset now: "Yes I realize that, but we can afford to pay now and we don't want to deal with compounding interest".
The attendant: "Sir, recurring payments cannot be set up during the grace period".
Even more upset: " What do you mean I cant make payments? Do you mean to tell me that we just have to sit back while the interest runs up (see my first posting for how big the interest is on student loans in Canada)? They don't tell you about this part of the scam while you are in school?"
Her reply: " You can make payments during the grace period, you just have to make them manually."
I'm told that in order to make manual payments, I need to use online or telephone banking and set up a payee with the account number equal to my fiance's student loan number. Here is the catch, we don't know her loan numbers. Had we not called, we would have waited until the end of the grace period to receive them.

Anyway, the moral of the story is that Canadian student loans are a big bloody scam. Call them the day you graduate. Get your loan number and start repayment immediately. Otherwise, its like dealing with the mob, the juice gets added to the principle and the clock keeps running.

Thanks for listening to my rant, I hope you learned something.

Until next time.

Saturday, October 21, 2006

My Mortgage Advice For a First Time Homebuyer

As a new homeowner (a little over a month now), I figure that I would pass along the wisdom I gained in this transaction.

One tool available to first time homebuyers is the 1st time home buyers plan. Through this plan, the Canadian government allows new home buyers to withdraw up to $20,000 from their RSP without penalty. This money must be paid back to your RSP within 15 years. For those looking to come up with a downpayment ASAP, I definitely recommend utilizing this opportunity. When I graduated university and started working about two years ago, owning a home was a priority. As a result I started squirreling money into my RSP as quickly as possible. The tax returns that resulted from my RSP contributions were also put into my RSP. Its amazing how fast your savings can add up when you are disciplined.

Another option available to first time homebuyers is a spousal RSP contribution. If you are buying your home with your spouse, you can each withdraw $20,000. In my case, I had more than $20,000 saved for a house, buy my wife did not. My marginal tax rate was higher, so it made sense to apply my savings in addition to 20K to her RSP. In this case, that money applied towards her 20K limit, but I received the tax deduction.

Now that I had the money for my downpayment, I was ready to shop for a mortgage. During this process it became obvious that their are only two options: 1) ING 2)A mortgage broker.
When I first went shopping, a friend from work had a buddy who worked at TD. I was told he would "hook me up". I went in and was quoted his best rate. On a variable mortgage I was offered prime -.6% and 5.75% on a 5 year mortgage. Both much better than posted. I then went to a mortgage broker. They offered me prime -.8% for variable or 5.4% for fixed. My next stop was to ING, they matched the prime -.8% and did slightly better with 5.35%. ING had some terms that I liked, such as paying off up to 25% of the mortgage each year via a lump sum payment and the option to increase mortgage payments up to 25% each year. So in the end I went with ING.

A few weeks after closing my mortgage, the guy from TD called asking if I was still looking for a mortgage. I told him the rate I got though ING and his response told me I had made the right choice: "You got a great rate. That is probably the best rate I could have got you, but even then, my manager would have needed to approve and I wouldn't have received any commission".

THE MORAL:For those who don't have a friend at the bank, I highly doubt that you will be offered anything better than ING is posting. Especially on your first home purchase.

Hopefully this helps you in your house hunting.

Until next time.

Thursday, October 19, 2006

Student Loans in Canada

As my first blog, I think it would be only right to post about one of the things I am most passionate about. STUDENT LOANS!

I am 26 years old and have been out of school and working for about 2 years. I've been very fortunate to land a great job that pays better than most available to those with my age and experience, but I still find my student loans to be very burdensome. At $600/month, it will take me another 6 years to pay off it all off. If I did not have such a great job, I cant fathom how I would get by. A person making $30,000 a year brings home about 2K a month. $600/month is 30% of that take home income. $1400 a month doesnt go very far in Toronto (where I am) considering rent is typically 700-900 for a 1 bedroom.

The student loan system is designed (apparently) to help students coming from low income households get post-secondary educations and build a better life. Now that I have been in repayment a while, I realize that this really isnt the case. In this first blog, lets touch on my biggest point of contention, interest rates. In future blogs I will adress problems with 1)The grace period 2)The beauracracy of Canada's student loans.

Im currently paying prime plus 2.5%. With today's prime rate at 6% Im paying 8.5% interest. This is outrageous. Consider that my credit card rate is 6.99%. If this is a government program designed to help the poor, why am I gouged with interest rates as soon as I graduate? In the US, I just read that a new graduate had consolidated thier loan at 4.25%. The prime rate in the US is 2% higher than in Canada! Think about it, Canadians pay prime + 2.5%, Americans pay prime -4%. But gets worse. That prime -4% interest rate (4.25%) that the American is paying is fixed! That person doesnt have to worry about interest rates going up. The rate im paying is variable. I do have the option of locking in my rate, but at prime +5%! 11% interst. Did I just get out of school, or out of prison? Lets look at the impact this would have on my monthly cashflow. If I were paying 4.25% instead of 8.5% on my $37,000 in loans (yes its ugly). I would pay $1,572.50 less in interest each year. I would have an extra $131.04 in my pocket each month, just due to a more equitable interest rate. What if I wanted an apples/apples comparison. Fixed rate vs fixed rate. Under this example, I would be paying $2497.5 more in interest every year, or 208.13/month. Imagine what you could do with an extra $200 a month.

Until next time.