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 wait...it 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.

5 Comments:

At 11:47 PM, Anonymous Anonymous said...

With such a high payment have you checked to see if you qualify for interest relief? If you qualify your payments are suspended, the gov't pays the interest and here's the sneaky part...you can still make payments manually which go straight to principle.

Also keep in mind that your rate might be 8.5% but with the tax credit the effective rate is lower. For example in my province 8.5% would work out to about 6.25% after the tax credit. Your mileage, I mean province may vary. :-)

Also when comparing to the US (I have relatives there) students typically graduate with larger loans than Canadians. And although they also have a tax deduction for student loan interest it is much more restrictive than in Canada. For example the deduction phases out as your income rises.

 
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