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What is the Difference Between Government Loans and Private Student Loans?

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With tuition rates steadily rising each year , more and more students are forced to take out student loans to cover the cost of their postsecondary education. As of 2021, there are more than 1.7 million student borrowers in Canada and the average student debtor now owes around $26,000 , according to recent figures.

While postsecondary education is, in many ways, an investment in one’s future, skyrocketing tuition costs in the country have become a burden for young people, saddling them with astronomical levels of debt that many are now struggling to pay back. Statistics Canada reports that two-thirds of students who graduated in 2015 still hadn’t repaid their debt by 2018.

A recent report by RBC found that annual tuition rates have been steadily rising for the last twenty five years, with tuition rates outpacing the rate of inflation every year since 1982. Between 2006/7 and 2016/17 alone, university tuition fees rose an alarming 40 percent in Canada.

In the 2021/22 academic year, undergraduate students at Ontario universities paid an average of $7,938 in annual tuition fees—well above the national average of $6,693 —while college students in the province paid an average of $6,100 , according to recent data from Ontario Colleges .

Recent figures suggest that 40% of university and college graduates took out a loan of some kind to fund their education. Of these, 75% of student borrowers turned to government student loans to fund their education, while around 36% opted for private bank loans , but what is the difference between the two options?

Government student loans

The Canada Student Financial Assistance Program offers a number of grants and loans to help full- and part-time students cover the cost of their postsecondary education. Most provinces and territories also offer their own sources of funding as well, but the specificities of each program vary wildly.

While grants do not need to be repaid after graduation, both federal and provincial loans are repaid with interest starting six months after you graduate or finish your studies. Federal loans have an interest rate of 2.5% plus prime , while provincial interest rates vary from territory to territory . In Ontario , the interest rate is 1.0% plus prime (currently 2.45% as of December 2021).

The amount that you can receive depends on several factors , including:

-       Your province or territory of residence

-       Your family income

-       If you have dependents

-       Your tuition fees and living expenses

-       If you have a disability


Other factors, including the time elapsed since the borrower graduated high school , whether or not the borrower must relocate to attend school , and the type of degree that the borrower is pursuing , can also have an effect on the final number. In some cases, unique personal circumstances not easily translated in a loan application will be taken into account.

After the end of your six-month grace period , you will be required to start paying back your loans. Students facing temporary challenges are eligible to apply for a delay in repayment or to negotiate reduced monthly payments , both of which are determined by your personal income. Repayment assistance must be revisited every six months that students are in need. If you fail to reapply, the government will expect monthly installments to be paid in full starting immediately.

Private student loans

Private student loans are an alternative to government student loans for those who do not qualify for the latter, or for whom the funds dispersed by government bodies will not cover the full amount of their tuition and/or expenses. These include options such as loans, student lines of credit, or private equity loans from banks, credit unions, or online lenders.

While governments typically offer a greater range of funding options for students, loans from private lenders are often quicker and more flexible .

A student line of credit usually provides borrowers with between $10,000 and $20,000 per year up to a maximum amount, which is determined by the individual’s level of study . Like government student loans, the dispersal amount is also determined by factors like your occupation, income, and living expenses. In some cases, institutions may require a co-signer to secure the loan.

These funds can be used at an individual’s own discretion . So, if you don’t need to use them, then you have no repayment obligations and will not be charged any interest. If you do, however, interest will begin to accrue, and you will be required to make monthly payments. Interest rates can vary between 3.00% and 36.00% depending on your income, credit score, and existing debt load.

Keep in mind that private loans can also affect your eligibility for scholarships, bursaries, and government loans.

Strategies for repaying student loans

While the initial shock of your education bill can be debilitating, with a little foresight and planning, you can take quickly charge of your situation. Budgeting and prioritizing high-interest loans , especially if you hold both government and private debt, are great strategies for mastering your student loans.

All student loans, regardless of whether they are from a bank or the government, are only eligible for discharge, along with their other debts, seven years from the end of study date.

Crawford, Smith, and Swallow’s Licensed Insolvency Trustees (LITs) are here to provide support you through financial hardships. Our experienced team have helped many people like you navigate this sensitive and sometimes challenging landscape. To book your free consultation, get in touch by phone or visit our website today.

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