Is it a good idea to consolidate a student loan debt?
Reports indicate that Canada’s amount of student loans is nearly $28 billion, which shows that it is a crisis in waiting. Most graduates that have benefited from such loans are left desperate for help, with many of them considering consolidation as the only way out. Although refinancing or consolidating a student loan is a possibility, the most important question is whether the advantages outweigh the disadvantages.
What led to the student loan crisis in Canada?
Tuition fees in Canada have been steadily increasing over the last years, which has led to a higher demand for financial assistance for students. Most of the loans have also had increased interest rates. With the job market also being unstable, most of the graduates reached the six-month grace period without a job that could help them start the repayment process. Many of them resorted to unpaid internships or jobs offering minimum wages to try to survive, which still does not allow them to make the minimum loan payments every month.
The Canadian government has recognized the student loan crisis in the country and is already putting plans in place to avert it. Several tuition-free programs are already in place for low-income families, and some states like Ontario have reduced the fees by 10%. Such measures only benefit students who are yet to take the loans, but to the graduates who need reprieve now, they are of no use.
Types of student loans in Canada
There are three main loan categories of loans namely:
Private loans: These are usually acquired from traditional lending institutions like banks, but sometimes other lenders may offer them. They come in handy when provincial and federal loans are not enough for tuition. Private loans typically have higher interest rates.
Federal loans: These have fixed or variable rates and are issued by the government through the Canada Student Loan Program.
Provincial loans: These also have variable rates and are offered by the respective provinces in the country.
Some states combine provincial and federal loans automatically after graduation to allow students to make single payments. Other provinces don’t consolidate them, which means you will pay two service loans. You can find detailed information about such consolidations online.
How refinancing and debt consolidation of student loans work
Refinancing and debt consolidation are usually used interchangeably, but they are not the same. With refinancing, a new loan, preferably one with better terms and rates, pays off the old loan. The student is left servicing the new loan only. With consolidation, several loans are combined to allow the student to make one payment at lower interest rates. For instance, if the student has federal, private, and provincial loans at the same time, they can look for another lender willing to combine all of them at a reduced interest.
Debt consolidation and refinancing are both good ideas under specific circumstances such as:
- Having already paid part of the loan, which shows they are reliable and trustworthy. Lenders will be willing to take a chance on them.
- Having a good or excellent credit score
- Having a stable or well-paying job
- Having a co-signer with a stable income or good credit score
The debt consolidation loan can also be used to settle other loans, especially unsecured ones. However, if it is used to pay credit card bills and the credit cards continue to be used, the student could end up with zero balances and eventually find it very difficult to keep up the new loan payments and the monthly credit card payments.
Disadvantages of refinancing or consolidating a student loan
The advantages of student loan consolidation or refinancing mostly apply to private student loans only. In most cases, transferring federal or provincial student loans to a private lender brings the following disadvantages.
Owing the bank instead of the government
The government sometimes creates debt relief programs that benefit students who still have federal or provincial loans. Going to a private lender takes away the eligibility of such students. More information about those programs and qualification criteria are available on the government website.
Loss on tax deductions
The interest on student loans is usually tax-deductible, which offers great savings annually. However, that is not available with private lenders.
The idea of dealing with one loan may be enticing, but the interest associated with such loans is very high, especially when you have a poor credit score. Generally, the government offers lower rates than banks and other private lenders.
A longer payment period means more interest in the long run
Debt consolidation makes it easy to pay a single loan over a longer duration, which means students end up paying more interest. The longer payment period may also make it harder for students to get loans in future.
Student loan assistance options
Before consolidating or refinancing, students should explore other options, especially those that the government creates to help them. If the six-months grace duration is over and you cannot make payments, or if your income is too little and you have fallen behind on the payments, you can consider Repayment Assistance Plan. They may stop the payment temporarily or reduce the amount, depending on how bad your situation is. Make sure you are eligible before applying.
Debt consolidation program
These programs are usually available with non-profit entities in Canada, and they don’t involve loan acquisition. The student arranges with the creditors to reduce the interest with the help of a certified credit counsellor. The unsecured loans the student has may also be rolled into one for reduced monthly payments.
The only problem with this option is that the loan must reach collections for it to be included in the Debt Consolidation Program.
In some cases, financial coaching helps students gain better control of their finances. You can work closely with credit counsellors to budget effectively and track expenses. These professionals can help you achieve your financial goals, depending on the income you can generate.
The only way to determine if a loan has reached collections is by calling the Collection Management Unit for the Ministry of Finance on 416-326-0500 for those with provincial loans, and CRA Collections Service—Canada Student Loan Centre on 1-866-336-7565 for those with federal loans.
Get help in just one phone call
If you are a graduate struggling to keep up with student loan payments and would like some guidelines, reach out to YorkCredit today. We will provide you with tips to help you manage your funds better.