Lana Oconnell
Paying off student loans in Canada can be a daunting task, with the average student debt estimated to be over $28,000 and a repayment period of about 10 years. However, there are several strategies and options available to help ease the burden. These include taking advantage of the 6-month non-repayment period after graduation, during which interest still accumulates, and then making payments above the minimum monthly requirement. Additionally, the Government of Canada offers assistance through the Repayment Assistance Plan, which can help with reduced or paused payments if financial difficulties arise. Prioritizing loans with higher interest rates and maintaining timely payments are also key factors in managing debt effectively. Ultimately, the decision to pay off student loans faster or extend the repayment period depends on individual financial goals and circumstances.
| Characteristics | Values |
|---|---|
| Average student debt | $28,000 |
| Average time to pay off loans | 10 years |
| Time until first payment | 6 months |
| Interest accumulation during the first 6 months | Yes |
| Repayment Assistance Plan (RAP) | Available for those facing financial difficulties |
| Reduced payments or no payments under RAP | Depends on income |
| Debt servicing ratio | No more than 35% |
| Default repayment term | 114 months |
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What You'll Learn
The six-month non-repayment period after finishing school
After finishing school in Canada, there is a six-month non-repayment period for student loans. This grace period allows graduates to find employment and prepare for loan repayment. During this time, interest still accumulates on the loan. Within this period, graduates can expect to receive a package outlining their repayment terms and options. This package will detail the monthly payment amount and when payments must begin.
The six-month non-repayment period is a standard feature of Canadian student loans, providing a buffer for new graduates. It's important to note that interest accrues during this period, increasing the overall loan amount. Graduates can use this time to create a budget and repayment strategy that works for their financial situation.
The Canadian government offers a Repayment Assistance Plan (RAP) to help those facing financial difficulties. RAP can reduce or pause payments and even forgive parts of the loan. This plan is available to those who qualify based on income, and reapplication is required every six months to maintain eligibility. The government will cover any interest owing on the federal portion of the loan that the reduced payment does not cover.
The National Student Loan Service Centre (NSLSC) is another resource for graduates. They can provide information and guidance on loan repayment, including provincial and federal loan distinctions. It is recommended to prioritize loans with higher interest rates to minimize overall interest charges.
The six-month non-repayment period is a standard feature designed to ease the transition from student to graduate life. It provides time to establish financial stability and understand repayment obligations. With the support of RAP and NSLSC, graduates can navigate their loan repayment journey effectively.
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How to make extra payments
After graduating or leaving full-time studies, there is a six-month non-repayment period for student loans in Canada. Within six months of finishing school, you will receive a package from the National Student Loans Service Centre (NSLSC) with information about your payment terms and options. You can also access this information online.
Once the non-repayment period is over, you can start making payments on your loan. Here are some ways to make extra payments:
- Prioritize high-interest loans: Focus on paying back your loans in order of the highest interest rate to the lowest. This will minimize the amount of interest you are charged overall.
- Make lump-sum payments: You can make one-time, lump-sum payments through the NSLSC website to accelerate repaying your loan.
- Pre-authorized debit: Activate this option online to automatically make monthly student loan payments.
- Use windfalls: If you receive a cheque for your birthday, a bonus from work, or simply didn't spend a lot one month, use that extra money to top up your loan payments. Remember to include a letter to the lender explaining what the extra money is for.
- Apply for repayment assistance: If you are having financial difficulties, the Government of Canada can help through the Repayment Assistance Plan (RAP). Depending on your income, you may qualify for reduced payments or no payments.
It's important to make regular, timely loan repayments to establish and improve your credit score. You can seek guidance from a virtual repayment counsellor to identify the best repayment path for your circumstances.
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The impact on future student grants and loans
Once you have finished your studies in Canada, there is a six-month non-repayment period before you have to start making payments on your loan. During this time, interest accumulates on your loan. After this grace period, you will receive a repayment schedule from the government, outlining the monthly payments you need to make.
If you are facing financial hardship and are unable to make your loan payments, the Government of Canada offers a Repayment Assistance Plan (RAP). Depending on your income, you may qualify for reduced payments or no payments at all. This assistance is available throughout the repayment period, but you must re-apply every six months to maintain eligibility. If you are approved for RAP, the government will cover any interest owing on the federal part of your loan that your reduced payment does not cover. After 60 months of RAP or 10 years after you finish your studies, the government will start to pay down the principal and any remaining interest. However, once the federal government has contributed to your principal payment while on RAP, you cannot receive additional student grants or loans. To access further student funding, you must pay off your existing loans.
When considering future loan applications, banks will assess your financial health by examining your debt servicing ratio (the proportion of your total income that goes towards debt repayment). They typically want this ratio to be no more than 35%. Therefore, having a large student loan debt may impact your ability to secure other loans.
Additionally, it is important to note that paying off your student loan early can have both benefits and drawbacks. While it can provide a sense of financial freedom and reduce the burden of debt, paying off your loan early may not always be the best decision in terms of optimising your credit score. Maintaining a mix of credit accounts, such as a mix of instalment loans (e.g., student loans) and revolving credit accounts (e.g., credit cards), can positively impact your credit score.
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The importance of a budget
Paying off a Canadian student loan can be a daunting task, with the average student debt estimated to be over $28,000, and most students taking a decade to pay it off. Therefore, having a budget is crucial to effectively manage your finances and accelerate debt repayment.
A budget is a plan that outlines your income versus expenses, helping you understand how much money is coming in and where it is being spent. It is a powerful tool that enables you to make informed decisions about your money and ensure it is aligned with your financial goals. By creating a budget, you can allocate your funds efficiently, including making timely student loan payments, covering essential expenses, and even saving for the future.
The first step to creating a budget is to calculate your net income. This includes any earnings from employment, investments, or other sources. Next, list all your monthly expenses, such as rent, groceries, utilities, transportation, and, most importantly, your student loan payments. Be sure to prioritize expenses that are necessary and fixed, such as loan payments, followed by variable costs like groceries, where you may have more flexibility to reduce spending if needed.
Once you have a clear understanding of your income and expenses, you can start allocating your money accordingly. Ensure you meet the minimum monthly payment for your student loan to avoid late fees and maintain a good credit rating. If possible, consider paying more than the minimum to reduce the loan term and the overall interest paid. Any unexpected income, such as bonuses or gifts, can also be used to make additional loan payments.
It is important to regularly review and adjust your budget as your financial situation changes. This may include increases in income, changes in interest rates, or unexpected expenses. By staying on top of your budget, you can ensure that you are making progress in paying off your student loan and achieving your financial goals.
In summary, budgeting is a valuable tool for anyone looking to manage their finances effectively, especially when faced with significant debt like student loans. It empowers individuals to make informed decisions, allocate money efficiently, and work towards financial stability and freedom from debt.
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What to do if you're having financial difficulties
If you're having financial difficulties and are struggling to make your loan payments, the Government of Canada can help you through a Repayment Assistance Plan (RAP). Depending on your income, you may qualify for reduced payments or no payments at all. You can apply for this assistance as soon as you start repaying your loans and at any time during the repayment process. To remain eligible, you must re-apply every six months. If you are approved for RAP, the government will pay any interest owing on the federal part of your loan that your reduced payment does not cover. They will also start to pay down the principal and any remaining interest after 60 months of RAP or 10 years after you finish school.
If you miss a loan payment, you can log in to your National Student Loans Service Centre (NSLSC) account to access tools to help you find a new repayment plan. You can also contact the NSLSC to discuss your options. If you have student loans from Alberta, Nova Scotia, or Prince Edward Island, you will need to contact your province. If you miss nine months of payments, the federal part of your loan is sent to the Canada Revenue Agency (CRA) for collection. Once in collection, you will no longer be able to receive student aid until you bring your loan up to date. To do this, contact the CRA to make a payment arrangement.
It's important to remember that you can pay more than the required minimum each month if you are able to. If you receive a cheque for your birthday, a bonus from work, or simply don't spend a lot one month, you can use that extra money to top up your payments. Just be sure to include a letter to the lender explaining what the money is for so that they don't apply it to your next month's payment.
Additionally, consider creating a budget to help you understand how much you should be paying towards your loans each month and how much you have left for other expenses. You can also look into ways to save money, such as getting a roommate or moving back in with your parents to lower your household costs.
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Frequently asked questions
The repayment period for a Canadian student loan is 114 months or 9.5 years. The Canadian Federation of Students estimates that the average student debt is more than $28,000, and it takes most students about 10 years to pay off their loans.
No, there are no penalties for early repayment of Canadian student loans. You can pay more than the required minimum each month, and you can also pay off your loan early if you so choose.
If you are having financial difficulties and are unable to make your monthly payments, the Government of Canada offers repayment assistance plans. Depending on your income, you may qualify for reduced payments or no payments at all. You can apply for this assistance as soon as you start repaying your loans, and you must re-apply every 6 months to stay eligible.
