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Student Loans in Canada: Financing Education

Written By

Clay Shiffman

Understanding the intricacies of student loans in Canada is paramount for prospective students and their families as they embark on higher education. Whether you're going to university, college, trade school, or some other post-secondary program, it'll likely cost you some big bucks. With the rising tuition, textbooks, and living expenses, many students rely on financial assistance.

Student loans help students to get financial support for all the expenses related to higher education. Students have many options, including government-sponsored programs and private leading institutions. It's essential to understand the application processes, eligibility criteria, and loan terms to make an informed choice of how you'll finance your education.

Qualifying for a student loan depends on several factors, such as family income, number of dependents in your household, tuition fee, and other factors. The amount of loan you qualify for is determined based on your eligibility criteria.

We dive into student loans to give you a comprehensive guide on financing post-secondary education. Understand what a student loan is, why you may need it, how to get one the different types of loans at the federal, provincial, and territorial levels, and other options to consider.

What is a student loan?

Student loans are a type of financial assistance provided to students to help cover the costs associated with pursuing higher education. These loans can finance all or part of tuition fees, textbooks and study materials, accommodations, and other educational-related costs while you're in school.

When a student takes out a loan, they borrow money from a lending institution, such as a government agency or a private lender. The student is required to repay the borrowed amount along with any interest accrued over the loan period. The terms and conditions of student loans, including interest rates, can vary depending on the type of loan and lender.

Repaying your student loan typically begins after you graduate, leave your program, or change your enrolment status to less than part-time. The repayment period, interest rates, and other terms vary with the specific loan agreement. It's essential to carefully review and understand the terms of your loan before borrowing money to ensure you can manage the debt obligations responsibly.

There are two primary categories of student loans - government and private student loans.

Government student loans

A government student loan offers financial aid from government agencies, such as Canadian federal and provincial governments, to qualifying students. Government student loans often have lower interest rates and more flexible repayment options than private loans. The Canada Student Loans Program (CSLP) provides eligible students with additional student financial assistance available from provincial student loan programs.

Private student loans

Private loans are offered by private financial institutions, such as banks or credit unions. These loans can supplement government loans or cover educational expenses not covered by other student aid programs. A private loan may have higher interest rates and less flexible repayment terms than government loans.

Why apply for a student loan?

Post-secondary education can be expensive. Regardless of which school or program you attend, higher education is likely an expense you've started to save for many years in advance. Applying for student financial assistance is a strategic and beneficial decision.

For many students, getting financial aid may be the only way to afford the high costs of pursuing higher education. Higher education is an investment in your future career and earning potential. By obtaining a degree or certification and learning skills you can use in the workforce, you increase your career advancement opportunities. Student loans can allow these students to continue their learning journey and gain the knowledge and experiences required to fend for themselves in the real world.

Some student financial assistance programs give students flexible repayment options, making these loans easier to manage. Government-sponsored student loans often come with income-driven repayment plans and loan forgiveness programs. These programs provide some financial relief for students as they start their financial and career journeys.

Federal student loans

In Canada, federal student loans are administered through the Canada Student Loans Program by the federal government. To qualify for a federal loan, you must be a Canadian citizen, permanent resident, or protected person. Applicants must also be enrolled in a designated post-secondary institution as full- or part-time students and demonstrate financial need based on factors like family income and tuition fees.

Students can apply for federal loans online, providing relevant information like personal and financial circumstances and details about the educational program. The Canadian government assesses each application and determines whether to approve it and how much funding to provide.

Repayment typically begins six months after the student completes their education, leaves school, or changes their enrolment status to less than part-time. The repayment period, interest rates, and other terms vary depending on the loan agreement. Federal student loans typically have lower interest rates than private ones.

Provincial and territorial student loans

In addition to federal student loans, each province and territory offers student aid programs to qualifying full- and part-time students. These loans complement the federal student loans to provide additional financial assistance. Students may have both federal and provincial or territorial student loans to finance their higher education.

Provincial and territorial loans' eligibility criteria and application process are similar to those of federal loans. You can apply for financial aid using the relevant applications through the government's website or the student financial assistance office. Applicants must reside in the province or territory where they apply for loans and demonstrate financial need. The application form may require personal and financial information and details on your educational program.

Approved funding goes to your account or directly to the designated educational institution. Repayments typically follow the same timeline as federal loans, and interest rates and terms vary depending on the policy of the province or territory. The interest rates may differ from your federal student loans.

Understanding registered education savings plans

Many Canadian students receive student aid through Registered Education Savings Plans (RESPs). A registered education savings plan is a tax-advantaged savings account designed to help Canadians fund higher education expenses, like tuition, textbooks, accommodation, and other related costs.

Parents, guardians, family members, and others can open an RESP on behalf of a child or themselves. One of the primary benefits of RESPs is the tax-deferred growth offered. Investment income earned isn't taxed until withdrawn, allowing savings to grow faster than in a taxable account.

The government provides various incentives like the Canada Education Grant (CESG) and the Canada Learning Bond (CLB) to further boost savings. The earlier you set up an RESP, the more time the money contributed has time to grow. RESPs offer flexibility in terms of investment options, such as mutual funds, stocks, bonds, and guaranteed investment certificates (GICs).

You can tailor your portfolio to your risk tolerance and investment objectives. Withdrawals consist of contributions that aren't taxed and investment income, which is taxed to the beneficiary at their lower tax rate. You can transfer unused funds to another eligible beneficiary, a Registered Retirement Savings Plan (RRSP), or withdraw them as an Accumulated Income Payment (AIP), subject to taxes and penalties.

Scholarships and bursaries

Scholarships and bursaries are forms of student aid that don't need to be repaid. They are a great option if you want financing for higher education but are worried about the extra debt burden from student loans. Both options can significantly reduce the financial pressure of being a student, making higher education more accessible and affordable for students from diverse backgrounds. Students need to research and apply for scholarship and bursary opportunities early, as deadlines and requirements may vary based on the program.

Scholarships

Scholarships are awarded based on academic achievement, extracurricular involvement, leadership qualities, and other merits. Financial and educational institutions, such as colleges and universities, private foundations, corporations, government agencies, and community groups, recognize and reward students for their accomplishments and potential.

They are typically competitive, as many students can apply for the same merit-based scholarships. Applicants may need to demonstrate exceptional academic performance or other noteworthy achievements to be considered.

Some scholarships may have specific eligibility criteria in addition to the merit-based requirements. For example, certain scholarships may consider the field of study, geographic location, or demographic characteristics.

Bursaries

Bursaries are typically awarded based on financial need rather than academic merit. They assist students who may not have the financial resources to cover their education expenses. Bursaries may have more flexible eligibility criteria than scholarships. In addition to financial need, other factors considered include personal circumstances or extenuating financial hardships.

Students can apply for bursaries with educational institutions, charitable foundations, government agencies, and similar organizations. They are often used to provide immediate financial relief to students with financial difficulties. Unlike scholarships, which may be renewable, bursaries are typically awarded on a one-time basis for a specific period or purpose.

Do I qualify for a student loan?

Consider several factors to determine if you qualify for a student loan, including your citizenship or residency status, enrolment in an eligible educational program, financial need, and other criteria specific to the program. Most programs offered by the government require applicants to be Canadian citizens, permanent residents, or protected persons. International students may have limited access to student loan programs and may need to explore other financial assistance options.

Eligible programs for receiving financial aid typically include degree, diploma, or certificate programs offered by universities, colleges, and other recognized educational institutions. As long as you prove a need to receive financial assistance and meet the eligibility requirements of the loan, you can apply. Some loans may require students to maintain satisfactory academic progress, such as passing a minimum number of courses or achieving a certain grade to remain eligible for funding.

Private lenders, like a financial institution, may consider your credit history as part of the application process. A good credit history can improve your chances of being approved for private loans. It may also impact the interest rates and terms offered.

How big of a student loan do you need?

The size of your loan depends on your situation and how much funding you need to pursue your program. It can fund your tuition and help you avoid hidden costs like books, school supplies, meal plans, and student loan fees. Some students need financial aid to support living expenses, like a dorm, food, transportation, and utilities. You may also have personal expenses like entertainment and personal care items.

You may have financial assistance from other programs, like scholarships, bursaries, grants, a registered education savings plan, or income from savings, jobs, and contributions from family members. Determine how much you expect to spend on your education and how much savings and financial aid you'll receive. It'll give you a better idea of the amount you need and how to budget your student loan responsibly.

As with any debt, a student loan is a big financial responsibility. Consider your ability to repay the loan after graduation and the timeline. Create a financial strategy to repay your loan in a reasonable timeline. Student loans must be repaid with interest after the six-month grace period, so borrowing more than necessary and prolonging repayments can increase debt levels and repayment burdens.

How to apply for student loans

Here's a general outline of how to apply for a student loan in Canada.

Research

There are many financial aid programs available from the Canadian government, both at the federal and provincial or territorial levels. Private lenders like financial institutions offer options for domestic and international students. Research your loan options to the potential loans and amounts you qualify for. Compare interest rates, repayment terms, and eligibility criteria to find the best loan.

Gather documents

Gather documents and relevant information you need for the application process, such as personal identification documents, proof of enrolment in an eligible educational institution and program, proof of income and financial need, and other documentation required by the loan provider.

Apply

Fill out the student loan application form and submit it with the required supporting documentation. Ensure the requested information is complete and accurate. Once your application is processed, you'll receive a loan offer with the terms, including the interest rate, repayment timeline, and eligible amount.

Accept

If you're happy with the loan terms, you can accept the loan. It'll likely go directly to your account or your educational institution towards tuition, student fees, and educational materials. You can also use the funds towards housing, food, transportation, and other expenses. Ensure you follow the repayment terms to avoid penalties.

Loans for international students in Canada

As an international student, you may have limited student funding options than domestic students. Here are some potential sources of financial aid available:

Seeking guidance from the financial aid office can help you understand your options and navigate the process of securing funding for your studies in Canada.

Student line of credit vs. a student credit card

A student line of credit is a flexible loan product that provides access to a predetermined credit limit. The credit limit is typically higher than that of a student credit card. Students are required to make regular payments on the amount borrowed, typically in the form of interest-only payments, while they're still in school. You'll start paying interest and the principal after you graduate or leave school.

A student credit card is a revolving credit account that allows you to make purchases up to your credit limit. It's primarily intended for daily expenses, like entertainment, groceries, and transportation. Students are required to make the minimum monthly payment on the outstanding balance. You have to pay interest if you carry a balance month-to-month. Credit cards can be a valuable tool for building credit history, setting you up for success in the future to secure additional financing.

Using a personal loan

Using a personal loan to finance your higher education is also an option, but it comes with a few pros and cons. A personal loan offers flexibility, as you can use it for anything, including expenses unrelated to your education. They typically have a faster approval process than student loans, giving you access to funds quickly. You can also build credit with a personal loan, improving your credit history and teaching you valuable credit management skills.

Unlike student loans with specific eligibility criteria, like academic merit, financial need, enrolment status, and citizenship, personal loans are available to a wider range of individuals. If you're an international student or your enrolment status is less than part-time, you may not be eligible for certain student loans. However, you may qualify for a private loan.

There are also specific risks of personal loans for Canadians. Borrowing more money than you can manage can result in expensive interest charges or trap you in a debt cycle. Not borrowing enough money can cause a financial burden if you can't afford tuition, living expenses, or other fees. Personal loans also have compound interest and potential hidden fees.

Finance your education with KOHO

Budgeting and credit building are important for students. In addition to student loans, you'll likely have daily expenses to account for. KOHO can help you manage your spending and finances responsibly to ensure you have the funds to finance your higher education.

With a virtual credit card, you can easily spend on necessities without reaching for your wallet. You can also earn cash back on every dollar spent while you're grocery shopping, paying for gas, shopping, or going out with your friends.

Get a free credit score to stay on top of your overall financial health and ensure you're on the right track to build your credit with KOHO. Gain access to budgeting tools, spending insights, and resources to teach you how to develop strong credit management habits.

If you get stuck in an emergency, overdraft protection coverage can help you stay afloat. For as little as $2 per month, you get a cash advance right away to cover unexpected expenses. Unlock up to $250 zero-interest coverage with regular on-time payments.

In addition to credit-building tools, you can earn interest on savings with a high-interest savings account. Whether you're preparing for your post-secondary education journey or saving up for a graduation trip at the end of your education, you can maximize earnings on every dollar deposited.

Learn more about how KOHO can support your education today.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!