How Student Loans Work in Canada: Types, Eligibility, and Repayment

Student Loan in Canada

Are you a student attending college in Canada and in need of financial assistance? Look no further than a student loan program! But before you dive in, it’s crucial to understand student loan interest rates, repayment schedules, and exit fees.

We’re here to guide you through the process and ensure that you’re fully prepared for this exciting new chapter in your life. Filing Taxes also provides wonderful financial aid representatives that help you explore various funding options.

Don’t let financial concerns hold you back from pursuing your dreams. Let us help you unlock your full potential and achieve your goal

What Are Student Loans?

In the simplest terms, a loan is a monetary amount exchanged from one person or business to another.

Eligible students will receive a loan from the government to support them throughout their academic year. The loan can go towards accommodation, transport, study materials, food, and whatever else the student needs to complete their course.

Loans Vs. Grants

It is important to remember the difference between loans and grants – the Canadian government offers both, so it is easy to confuse them. While the outcomes of both options are similar, the biggest difference between them is a loan is repayable, and a grant is not.

Types of Federal Loans

If you want a student loan in Canada, you have to understand the different types of loans offered:

  • Bank loans – As the name suggests, this type of loan comes directly from a bank of your choice. Banks will usually ask for fixed monthly repayments.
  • Provincial loans – Each province has its own loan program for students. The downside here is that some provinces charge higher interest rates than others.
  • Private loans – If your government loan is insufficient for living expenses, you can look into private loans. Most people in this situation opt for a personal line of credit, often called a student line of credit. The main downside to this option is that you need someone reliable to co-sign the document.

Federal Student Repayment Options

You may wonder about the repayment plans if you have federal student loans. The good news is that there are a few options, meaning there is something to suit almost every situation.

Standard Loan Repayment Plan

Who is eligible? Everyone who takes a loan is eligible for this type of plan.

Who should explore this option? The standard loan repayment plan is suitable for people who want to pay off their loans as quickly as possible to avoid paying more interest.

How does it work? If you are on a standard loan repayment plan, you will make fixed payments over 10 years.

Who should rethink this option? This plan is not a good idea for people eligible for loan forgiveness.

Graduated Loan Repayment Plan

Who is eligible? Everyone who takes out a loan is eligible for this type of plan.

Who should explore this option? This plan is brilliant for people who predict salary increases in the future. It is also a good idea for people who want to pay off their loans quickly and avoid as much interest as possible.

How does it work? If you are on a graduated loan repayment plan, your first payments will be far lower than later ones. This plan spans 10 years.

Who should rethink this option? This plan is not a good idea for people eligible for loan forgiveness.

Extended Repayment Plan

Who is eligible? Almost all borrowers qualify for this repayment plan. If you have a federal direct loan or a Federal Family Education Loan (FEEL), you must borrow more than $30,000 to be eligible for this plan.

Who should explore this option? This plan is ideal for people with large balances to spread over an extended period.

How does it work? The borrower can choose between fixed or graduated payments. This plan spans 25 years.

Who should rethink this option? People who want to pay as little interest as possible on their loans.

Pay as You Earn Repayment Plan (PAYE)

Who is eligible? Anyone who received a direct loan payment on or after October 1st, 2011.

Who should explore this option? The great thing about this plan is that the monthly payment is only what you would pay on a standard plan. It is good for people who can only afford low monthly payments.

How does it work? PAYE takes monthly payments of 10% of your discretionary income. Discretionary income is whatever remains after you have paid for personal necessities like food and accommodation.

Who should rethink this option? If your income fluctuates significantly, this is not a good plan.

Revised Pay as You Earn Repayment Plan (REPAYE)

Who is eligible? Eligibility is dependent on income.

Who should explore this option? This plan is perfect for people who can only commit to a low monthly payment and those who do not mind paying more interest.

How does it work? If you are on this plan, you will only pay 10% of your monthly discretionary income.

Who should rethink this option? If you are part of a married couple and will file a joint tax return, this may not be the best option. It is income-dependent, meaning your spouse could impact your eligibility.

Income-Based Repayment Plan (IBR)

Who is eligible? You qualify for this plan if you have direct subsidized or unsubsidized loans, Federal Stafford loans, consolidation loans, and student PLUS loans. To meet the criterion, you must also have a high debt-to-income ratio.

Who should explore this option? The great thing about this plan is that you will never pay more per month than you would on a standard plan. It is ideal for people who can only commit to low monthly repayments.

How does it work? Borrowers pay 10% or 15% of their discretionary monthly income for 20 to 25 years. After 25 years on this plan, you will be eligible for Public Service Loan Forgiveness.

Who should rethink this option? This is not the most cost-effective option if you can afford to repay more than 10 to 15% of your discretionary income per month.

Income-Contingent Repayment Plan (ICR)

Who is eligible? The eligibility criteria for this plan are based on your income.

Who should explore this option? This plan is excellent for people who want to put a decent chunk of their income towards their loans but also for people who cannot afford the standard plan. ICR is a nice middle-ground.

How does it work? Borrowers pay a fixed amount for 12 years. The amount is either 20% of their discretionary income or the same amount they would pay over the same period based on their fixed income. You will pay whichever is less.

Who should rethink this option? If you have more loans than just direct loans, this is not a good plan for you. And if you are part of a couple that files jointly and is in a higher tax bracket, it is not a good option.

Income-Sensitive Repayment Plan

Who is eligible? This repayment plan is available to people with a Federal Family Education Loan.

Who should explore this option? Rather than paying more per month on standard plans, lots of FFEL borrowers choose this plan and pay significantly less.

How does it work? On this plan, borrowers pay an amount each month that is based on their annual income. This plan spans 15 years.

Who should rethink this option? If you are interested in loan forgiveness, this is not the repayment plan for you.

Private Student Loan Repayments

You have far fewer repayment options if you have a private student loan.

  • Interest-only repayments – You will make interest-only repayments while you are still in school. Once you graduate or transfer onto half-time enrollment, you will pay principal and interest payments.
  • Immediate repayment – As soon as you get your loan, you will repay the principal and interest.
  • Fixed payments – You will pay a fixed sum while you are still in school. Once you graduate, leave school, or go below half-time enrollment, you will start making bigger payments.
  • Full deferment – You do not pay anything while you are still in school. You will start making principal and interest payments within a set time frame when you leave school.

Can My Loans Be Forgiven?

Canadian students who meet specific criteria can have their loans forgiven.

  • Family doctors or residents in family medicine can receive up to $40,000 toward their loans. This amount is divided into five installments of $8,000 across five years.
  • Qualified nurses or nurse practitioners can receive up to $20,000 towards their loans. They will get $4,000 per year for a maximum term of five years.

Find Out More

This article includes a general summary of tax rules. Need specific tax advice? Hire a Professional Accountant and get the best working for you. 

Filing Taxes concisely deals with several complex issues; it is recommended that accounting, legal, or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Our experienced and professional team at Filing Taxes is here to set you on the right path considering your personal business situation. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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