Funding Your Future: Government vs Bank Student Loans

With prom night danced away and graduation caps thrown, it’s hard to believe that in just two short months, many graduates will return to school for their post-secondary education. Regardless of the program or institution, the stress of finances and student loans can damper the excitement for students and families. Financing your education can be a confusing and isolating experience, but in Canada, many students have the option of getting funding.

Student funding, including student loans, is one of the only lending scenarios where both banks and governments supply large sums of money to young people, who likely have little to no credit or assets. In a 2019 Statistics Canada report on post-secondary graduates who utilized debt to fund their education, it was found that 49% of those who graduated college and 54% of those who graduated university finished school with student debt. Of those graduates, 20% of college students and 45% of bachelor’s degree students owed more than $25,000. On average, students owed $21,650, an increase of 30% compared to the same study performed in 2000.

With tuition and cost of living on the rise, it’s important to understand the different types of student funding and their long-term implications. We’ve broken down the two main types of student loans to help you navigate the different funding options.    

Government student loans

Government student loans are normally divided into two parts: provincial and national. Government student loans can be a great financial aid option for post-secondary students. However, most government student funding has strict criteria, such as household income, that may limit you or your child’s ability to receive one.

When it comes to repaying government loans, provincial loans and their conditions vary, but most provinces offer repayment assistance and even 0% interest on their provincial student loans. National student loans also offer a Repayment Assistance Plan, and currently, interest on these loans is frozen until March 1, 2023. Repayment assistance is based on your income after graduation and must be applied for every six months to stay active.

In 2018-2019 the Canada Student Loans Program statistical review indicated that 85% of those in the Repayment Assistance Plan made zero payments. While this program can provide relief to students who are struggling to find employment after they’ve left school, it’s important to remember that these provincial and national loans can charge interest, so when you’re weighing your options, be sure to review the full terms of the student loan agreement before you sign.

Although many students need their parents’ information as part of the application process, these debts are not co-signed and are the sole responsibility of the individual who has made the student loan application. Provincial and national student loans also offer grants to some students which do not need to be paid back. These funds could be used to purchase books or extra supplies, but if you’re able, investing your grants into a high-interest savings account or a tax-free savings account can help you save for repayment.

Bank student loans

A bank student loan can be another way to cover educational costs. It is important to remember that many student loans offered by banks do require a co-signer, and therefore, payment of the loan would be the responsibility of the co-signer if the student were to fall behind on payments. That being said, like government student loans, many banks offer zero payment plans while you’re a student and for six additional months after graduation. This gives new graduates time to find a consistent income before interest begins accumulating.

Banks also offer professional student loans for those who are pursuing professional degrees like law or medicine. These loans do not require a co-signer and can be crucial to covering the costs of long-term professional degrees if government funding is not enough.

As with any other type of debt, it’s important to review your loan agreement and ensure that you are comfortable with the potential payments. Always ask clarifying questions like “what would my monthly payment be when I graduate” and “is the interest rate fixed (does not change) or variable (can move up and down).” This will give a better idea of how much the loan will cost in the long run.

Even with measures like the Repayment Assistance Plan, government grants, and low-interest rates, student loans can be a heavy burden. If you are unable to manage your student loan payments and have been out of school for more than seven years, a Licensed Insolvency Trustee (LIT) may be able to help. LITs are the only federally regulated debt professionals who can assist you in renegotiating your debt and start the path to a healthier financial future. If you are struggling with student loans or any other form of debt, reach out today for a free, no-obligation consultation.