A 2004 study funded by the Law Foundation of Ontario and the Law Society of Upper Canada found that 27 per cent of law students surveyed in Ontario expected to have debt totalling between $40,000 and $70,000, and that 13 per cent expected to graduate with over $70,000 in debt. This typically consists of government loans, personal lines of credit (PLCs), and credit cards. For many associates, dealing with a significant loan portfolio can be overwhelming. This article contains helpful information on managing student debt.
Loans obtained from provincial and federal agencies usually make up a major portion of student debt. Interest on government loans is deferred until full-time studies are completed. Most provinces match the federal government’s floating interest rate of prime (currently six per cent) plus 2.5 per cent. Nova Scotia, Quebec, and Ontario offer lower interest rates. The good thing is, in addition to having fairly competitive interest rates, the interest paid on government loans is eligible for a federal tax credit.
However, government loan programs alone will not cover the cost of law school in many provinces. As a result, many associates had to obtain a PLC to finance the balance of their education. A PLC is a revolving loan facility that requires a relatively small monthly payment — either the interest due or a percentage of the outstanding balance. Typical unsecured PLC interest rates for associates range from prime rate to prime plus three per cent. The bad thing is that PLC interest is not eligible for the federal tax credit for interest paid on student loans.
For some, even government loans and a PLC did not fully cover education costs, so they turned to credit cards to finance the rest of their education. Credit cards have ugly interest rates, typically in the range of 18 to 20 per cent, also with interest not eligible for the federal tax credit.
Here are some strategies to consider when managing your student debt:
• If you have outstanding credit card debt, pay it off as soon as possible. If the balance is sizable, transfer the outstanding credit card balance to a PLC to save interest.
• Negotiate the interest rate on your PLC. Shop around by talking to different banks and play them off against each other. Your goal should be to negotiate an interest rate of prime rate on your PLC.
• Do not transfer your government student loans to a PLC unless you can get a very low interest rate. For most provinces and income levels, the PLC rate has to be at or just above prime for this to make sense.
• In cases where cash flow is tight and you need money to meet basic living expenses, transfer your government student loans to an interest-only PLC to free up cash flow. As your income increases, you can then start paying off principle. You will not be eligible for the tax credit on interest; however, meeting your basic needs and avoiding financial hardship is more important.
If you are having trouble making your government-sponsored loan payments, apply for interest relief. Go to the web site below for more information.
Try to pay off your student debt in five years. Repayments on debt incurred during law school should not extend beyond 10 years. Establish realistic debt repayment goals with your financial adviser.
For more information on student loans, including interest relief and some helpful calculators to help you manage your debt, go to www.canlearn.ca.
Alan Acton is a financial adviser in Ottawa and can be reached at [email protected]. The opinions expressed are those of Alan Acton and not necessarily those of Raymond James Ltd. Statistics, data, and other information are from sources believed to be reliable but their accuracy cannot be guaranteed.
This document is for informational purposes only.