Experts warn about private vs. government student loans

Government student loans carry relatively high interest rates, but those interest payments are tax deductible. Getty Images

Another school year is about to begin. And another batch of young Canadians is considering their options when it comes to student loans.

The average undergraduate tuition last year was just shy of $6,400, a number that keeps climbing every year considerably faster than wages, according to Statistics Canada. Medical and law students faced fees above $10,000 a year, while undergrads enrolled in dentistry stood to shell out $21,000 a year.

READ MORE: University tuition fees in Canada rise 40 per cent in a decade

It’s little surprise that student debt loads keep rising as well. The average debt-ridden student in the graduating class of 2015 carried a load of $26,800, according to the Canadian University Survey Consortium.

WATCH: Our consumer reporter Anne Drewa has some timely advice for post-secondary students on how to avoid racking up too much student debt.

Click to play video: 'Keeping student debt under control'
Keeping student debt under control

Given the numbers — and the fact that interest rates in Canada have started climbing for the first time in seven years — why not shop around for the cheapest loan?

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Student lines of credit offered by private financial institutions, including the country’s big banks, often offer interest rates that are considerably lower than those of government student loans.

Canada student loans come with a fixed interest of prime plus 5 per cent. If you choose a floating interest rate, you’re looking at prime plus 2.5 per cent (the prime rate currently sits at 2.95 per cent, according to the Bank of Canada).

Compare that with RBC’s student line of credit, which charges prime minus 0.25 per cent. And you get two years after finishing school before you have to start repaying the loan.

At TD undergraduates can get a line of credit for exactly the prime rate and can make interest-only payments while in school and for the first 12 months after graduation.

You get the idea.

So why would anyone opt for a government loan?

Not so fast. Students who opt for private credit often aren’t aware that the interest they would be paying on government loans is tax deductible, tax experts have told Global News.

“The interest rate [on government student loans] can be claimed as an income deduction, so it lowers the income you have to pay tax on,” said Lisa Gittens of H&R Block.
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READ MORE: 6 tax credits and deductions that can save students (and their parents) a bundle

If you happen to have no income in a particular tax year (as may be the case of many recent graduates), you can carry forward that tax deduction for up to five years, according to Gittens.

That’s not the case for private loans and credit lines, though, she added.

WATCH: Best and worst provinces for student debt

Even consolidating your student loans into a line of credit will disqualify you for the tax deduction, according to the Canada Revenue Agency.

Folding multiple government loans into a single, lower-interest line of credit is becoming increasingly common, Gabrielle Loren, a Vancouver-based CPA told Global News in March.

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“The banks will literally set up tents on campuses to get students to sign up for lines of credit,” she told Global News.

Banks are especially keen on law and medicine students, who often graduate with six figures of student debt but also with a good chance of earning six-figure salaries.

Also, private student loans may come with flexible repayment plans, but Canadians don’t have to repay their Canada student loans until they start earning at least $25,000, noted Gittens. The change was introduced by the Trudeau government in 2016.

And borrowers who have trouble making their monthly Canada Student Loan payments may be able to get approved for a reduced monthly payment or for no monthly payment at all.

READ MORE: Ottawa writing off $178M in student loans

Some students may still be better off with a line of credit, especially if they expect to start earning a good salary right after graduation, said Gittens.

But students should do the math before choosing between a private or government loan, possibly sitting down with a financial planner to see how different post-graduation scenarios would play out, she added.

The best loan isn’t necessarily the one with the lowest interest rate.

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