Jeffrey Schwartz, executive director of Consolidated Credit Counselling of Canada in Toronto, says there are significant risks involved in co-signing for loans for students that parents should consider.
Like countless parents across the country, your heart swelled with pride when your child said those three magic words: "I got in!"
Your baby would be heading to university in the fall. But then, your (more practical) brain took over and posed that equally important question: "How are we going to pay for it?"
The cost of a postsecondary education in Canada is at an all-time high – the federal government's Canlearn.ca website pegs the average cost of a four-year degree away from home at nearly $60,000 for a four-year degree, while a recent TD Economics study found it to be a whopping $84,000.
Despite RESPs, part-time jobs, scholarships, grants and bursaries, many students will need to think about borrowing in order to fund their studies.
Along with tuition, student debtloads are also rising. TD says the average debt of university students is $27,747. And a recent Bank of Montreal study found that more students were more worried about paying for school (27 per cent) than getting a job upon graduation (22 per cent) or getting good marks (20 per cent). With this kind of financial pressure taking its toll, families may want to know what the options are when it comes to taking out a loan.
The most obvious choice is the government-backed Canada Student Loan, which is based on a student's financial need. (Generally, Ottawa covers 60 per cent and the province or territory covers the remaining 40 per cent.)
Students can receive up to $210 a week of study, they don't have to pay back the loan until six months after graduation, and interest doesn't accumulate while the student is in school. If they have difficulty repaying the loan after graduation, students can apply for the Repayment Assistance Plan, to negotiate monthly payments they can handle. At repayment, students can choose from a fixed interest rate (prime plus 5 per cent) or floating rate (prime plus 2.5 per cent).
But if parents are committed to paying for a child's schooling, is a home equity loan a good idea?
Dave Gillan, the Toronto-based vice-president of T.E. Wealth Financial Consultants, says he favours a student loan over a parent taking out a home equity home despite any benefit parents might get with better interest rates. For one thing, interest is tax-deductible on a student loan.
As well, parents need to think of their own financial situation before taking on that kind of significant debt, Mr. Gillan says. They might think they can afford the payments on a home equity loan right now, but if interest rates go up (as many financial analysts are predicting), they could put their home or retirement in jeopardy.
If your child does take out a Canada Student Loan, parents can pay it off while he or she is in school. But Mr. Gillan says he doesn't it, because "it's tax-deductible debt. If your kids are in school, you probably still have a mortgage and a car loan, so I would recommend paying those down first. The only people I would tell to pay it off as fast as you can is people who can't sleep if they have debt."
Another option for funding postsecondary education is the student line of credit, a product that is offered by several Canadian financial institutions.
Shahz Beig, associate vice-president of personal lending for TD Canada Trust, says a TD student line of credit has more advantages than a Canada Student Loan.
"[A student line of credit] comes at a lower interest rate generally than other borrowing vehicles," he said. "For example, in Ontario it offers a lower interest than an OSAP loan. We offer a student line of credit at a rate of prime plus 1.5. [per cent] and OSAP is prime plus 2.5."
A student line of credit has other advantages: You don't have to start making payments on the principal until 12 months after graduation, at which time you are required to pay 1 per cent a month; and you can access your money by ABM, Interac or Internet banking.
You do have to make regular payments on the interest while in school, although Mr. Beig points out that you are charged interest only on what you draw from the line of credit, as opposed to paying interest on a lump sum. (The Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce offer similar products.)
Might a line of credit encourage students to rack up a mountain of debt before the end of the first term? Mr. Beig says there are limits to keep spending under control.
"For undergraduates, we have limits up to $40,000. However, in your first year of school we will only go up to $10,000," Mr. Beig says. After a student's first year, he or she can request an increase.
If your child does apply for a student line of credit, as a parent, you might be required to co-sign for the loan. And there are significant risks involved in co-signing that parents should consider, says Jeffrey Schwartz, executive director of Consolidated Credit Counselling of Canada.
"Parents should only co-sign a student loan if they are willing and able to pay the full loan amount with interest should their child be unable to pay it," he said.
"Perhaps you've worked all your life, you've never been late on a payment, your credit report looks great and as a result you've been able to get a great insurance rate, great mortgage. All of a sudden, if your child fails to pay back that loan, it's going to fall to you to do it. And if you can't do it, that's going to impact your credit profile."
Mr. Schwartz says recent graduates often come into his offices overwhelmed because they're carrying both student debt and credit card debt, and their wages just aren't enough to keep up with the payments. That's why it's important to use a student loan as a lesson for kids to understand the importance of personal money management, he said.
"When they apply, this is an opportunity to put a budget together. Let's see what you have coming in and what we need to do to manage that money effectively, so we don't go too deep in debt."
Shelley White