Saturday, February 17, 2018

Calculated Thought: Matters of interest

October 19, 2016 by Sean Annable, contributing writer

Canadians are binging on cheap debt. Interest rates are at historic lows and household debt at record highs. Earlier this year, Canada topped the charts of G7 countries with the highest “debt to disposable income” ratio, recently clocked at 167 percent; for every dollar of after-tax income Canadians make, we owe $1.67 to someone else, on average.

Becoming financially literate is important for us all, students included. Statistics vary, but 50 to 60 percent of Canadian students will leave post-secondary with student debt.

You have the option of a fixed or variable interest rate with Canada Student Loans. A prime rate that takes the average rate of the big five financial institutions (CIBC, TD, BMO, Scotia, and RBC), after removing the highest and lowest values, is 2.7 percent at the time of writing.

Calculated Thought is a column dealing with student finances that is featured in every issue of Nexus.

Calculated Thought is a column dealing with student finances that is featured in every issue of Nexus.

You can choose a fixed rate, at prime plus 5 percent, or a variable rate—when the prime rate changes, your rate changes—at prime plus 2.5 percent.

If rates stay put for the next 10 years (which isn’t that likely), you’ll save over $3,000 if you opt for a variable rate on a $20,000 loan over 10 years.

Realistically, rates ebb and flow; more on that next issue. I’d still wager variable rate will save you money, but it’s a gamble.

Your federal student loan is charging interest on the entire balance during all non-study periods; you don’t have to pay during the grace period, but you are still being charged interest. However, while you’re settling up, your repayments are tax-deductible.

Another way for students to get their hands on some sweet, sweet cash is a student line of credit.

For many students, the rate is prime plus 1 percent. Same variable deal: prime goes up, your rate goes up. You’ll get less sympathy than with the feds (see loan forgiveness programs—I’m talking to you, nursing students); however, you only pay interest on the balance drawn.

If you have both types of loans, use these funds last and save on the interest. Paying down a student line of credit is not tax-deductible.

School costs money. Money costs money. Money is cheap these days, but that’s not necessarily a good thing. Stay tuned.

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