Student Loans and Education Financing updated 2013

1.  What student loan options do I have?

There are 2 main government student loan options (National and Provincial) and there are Education Loans from Financial Institutions like Credit Unions and banks.

2.  Which is best for me?

 I would recommend starting with the Provincial and National student loan programs.  You apply for both on the same application.  With these government student loans you do not pay or accumulate interest while you are going to school, there are some payment relief programs in place after graduation, and the interest paid on government student loans is tax deductible.  There are also some scholarships or grants that may decrease what you owe for government student loans.

More information can be found at http://alis.alberta.ca/ec/fo/pay/loans-grants.html

3.  So why would I use a credit union or bank education loan?  

What New Mortgage Rules Mean

CMHC Mortgage Insurance Rules Changes

Effective Monday, July 9, 2012, the Canadian Mortgage and Housing Corporation (CMHC) only provides mortgage insurance for loans with an amortization of 25 years or less when the borrowed amount is 80% or more of the property value.  Canadian law requires insurance on mortgages that exceed 80% of a property's value.

Amortization - This lowers the amortization limit from the 30 year maximum set out in 2011.  It was as high as a 40 year amortization in 2006, but the amortization period has been lowered by the federal government over the past several years in an effort to encourage consumers to pay off debts more quickly.

Debt Ratios - The government has also set the maximum gross debt service (GDS) ratio at 35% and the maximum total debt service (TDS)  ratio at 42% in order to qualify for CMHC insurance if you have a beacon score of less 680.  The ratios are at a GDS of 39% and TDS of 44% if the beacon score is over 680.  We calculate the GDS by adding up mortgage payments, property taxes and heat costs, and dividing by the borrower's income. TDS adds in other debt payments such as lines of credit and credit cards to get total debt payments.

Which Mortgage Is Best?

There are a variety of mortgages, and each one has its advantages and disadvantages.

A fixed rate, closed mortgage - about 75% of mortgages across Canada are fixed rate, closed mortgages.  Typically someone locks in their rate and payment for 5 years.  This lets consumers know what their payment will be every month and how much will be left on the mortgage at the end of the 5 year term.

A variable, closed mortgage - this mortgage has a rate that floats with a financial institution's prime lending rate and is often for a 5 year term.  Usually the payment is set at the current rate and then the actual interest rate goes up and down throughout the mortgage.  The advantages are that this rate is usually lower than a fixed rate and that if the rate decreases your payment is paying more towards the mortgage principal.  However, the disadvantage is that if the rate goes up you will pay more in interest and it is possible that very little of the principal is paid down by the end of the term.

Rates Are Going To Rise

Rates have been at historic lows for about 2 years in Canada, and about 3 years in the United States.  As the international and national economies improve, interest rates really have nowhere to go but up, and that is going to impact you.

There are 2 groups of consumers who will be most concerned with increasing rates: Investors/Savers and borrowers.  The first wants rates to increase, the latter does not.

Debt Is Way Too Easy?

"Don't Pay for 14 months!!  No Money Down!"

My kids can practically quote some of the TV commercials that have pitch men shouting slogans about how cheap everything is and that you should get it now.  Especially the vehicle and furniture retailers.  Those ads are on all the time.  I have to turn down the volume just so I can think. Maybe that's a part of their advertising gimmick, making only their sales slogan stick in your head and erase all the other ads.  Who knows?  I think it might work on my kids.  To them, getting the item is far more important than thinking of how you might pay for it.  They would be quite happy to borrow money for every little thing that comes up on TV.

Debt itself is not a bad thing.  In fact it can help us purchase things that just cost too much to realistically have saved for before we buy: ie. a house, vehicle, or education.  So for those things most of us have to borrow money, and it's worth it to have a mortgage so we can have a house..  But there are things where borrowing money doesn't really make a lot of sense.

For instance, if you pay for a computer on credit card and make low monthly payments on your card, you will probably have to replace the computer before you have even paid it off.  That's probably not a good thing to borrow for and pay back over 7 years.

The smart people at Wealth Web Gurus have a very good article about "Good Debt vs. Bad Debt."  It describes how debt can help you and when it isn't good for you.

The Financial Post has an article about how easy it is to get into debt.  The author, Gary Marr, thinks it is a little too easy to get into debt.  "Debt Becomes Us."

Using debt wisely can help everyone over the course of their life.  Use it unwisely and you'll end up with a whole lot of letters and phone calls, maybe even some guy named Vinnie knocking on your door at midnight, asking for the keys to the car.  Nobody wants that.

My own advice about debt is:  If you have to borrow for it, the value of the item should last longer than the loan.
Jerry

What does college and university cost?

We get this question quite a bit, especially in the fall when parents and grandparents are thinking about school.
The Edmonton Journal has a good article explaining the costs of education.  For 2009, the articles says that university tuition and books will cost about $6,500 a year, around $4,000 in personal costs, and another $11,000 for room and board if the student lives away form home.  These are general costs and will vary depending on the college and lifestyle.

http://www.canada.com/business/Post+secondary+costs/1971082/story.html

So that cost comes out to about $22,000 per year, and that's if the student lives moderately.  While there are Government Student Loans, and every financial institution has student loans (including us and our very good education loan), it's a lot better for the student to avoid all that debt by saving the money before school.  The best way to do that is through the Registered Education Savings Plan or RESP.

The basics of  RESPs are:

• You can open an RESP as soon as the child is born. 
• The money in the plan grows tax-free and the government offers special savings incentives (from 20% up to 40% depending on family income)
  
• When the child enters a qualified educational program at the post-secondary level, he or she can start drawing on the accumulated savings. 
• Only the child will pay taxes on the money he or she withdraws. Since many students have little or no other income, they usually don’t have to pay much, if any, tax when they withdraw money from their plan.

You can talk to one of our Member Service Representatives to find out more about RESPs or you can visit the following government website for more details about this very good program.
http://www.hrsdc.gc.ca/eng/learning/education_savings/index.shtml

Jerry