Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
The increasing cost of post-secondary education is resulting in more students taking on loans to fund their education, creating extra stress and anxiety. That means financial advisors have an increasingly important role to play in helping Canada’s post-secondary students and graduates get out from underneath this debt.
A recent poll of Canadian post-secondary students by financial institution Embark Student Corp. found that three-quarters (75 per cent) said it’s very difficult to afford a post-secondary education. While 53 per cent of students believe graduating with debt is part of the student experience, 79 per cent stated the amount of debt they take on during school can be debilitating.
In fact, the average student loan debt per person upon graduation in Canada was $15,578 as of July 2022, with 1.9-million Canadians owing the federal government a total of $23.5-billion in student loans, according to Employment and Social Development Canada.
These statistics highlight the enormous pressure mounting on today’s post-secondary students and the need for expertise in how to guide graduates through a payment plan. But for advisors to assist clients properly, they need to find out what kind of loans clients have as the interest rates differ substantially based on the type.
For instance, effective April 1, the Canadian government eliminated the interest on all Canada Student Loans, including those currently being repaid. While that would be a more ideal option than a line of credit from a financial institution because of the interest rates, it’s not always available because clients may not qualify for that government loan.
If a client does have a line of credit or another loan from a financial institution, it’s important for advisors to go over what recent interest rate increases have meant for the monthly payment. In most cases, the impact has not been that dire, says Sean Ryder, certified financial planner with Loreto Ryder & Associates Private Wealth Management at IG Private Wealth Management in Toronto.
“If I had a $15,000 debt at 8.2 per cent, the payments are $304 a month if I wanted to pay it off in five years,” Mr. Ryder says.
“If I wanted to pay it off in 10 years, it’s $182 [a month], a $122 difference. If you were borrowing that same money at 3.5 per cent last year, you would be paying $272 for five years instead of $304. So, only a $32 difference.”
Using tax refunds to pay loan
In terms of strategies to pay off student debt faster, putting money into registered retirement savings plans (RRSPs) to get the tax break, then using the tax return to pay down the loans is one Mr. Ryder employs with his own student debt. He also recommends it to clients regularly.
“If you can get more [money into] RRSPs, then it’s a compounding effect,” he says.
Mr. Ryder looks at clients’ current income and the RRSP tax refund they’d be entitled to, which could be upward of 30 per cent. Then, he figures out what kind of lump-sum payment they can put on their student loan to get it paid off faster.
“All of a sudden, I’m putting $10,000 into RRSPs and getting a $3,000 tax refund, which I would use [to pay off the student] debt,” Mr. Ryder says, stressing that this strategy only works if the client uses the return to pay down their student loan.
Mark Slater, senior wealth advisor and portfolio manager with Slater Financial Group at CIBC Wood Gundy in Toronto, also recommends this strategy to his clients because it’s about making the money work harder. He also tells clients about the new Tax-Free First Home Savings Account (FHSA) – which came into effect this year and allows people to contribute $8,000 a year. It can help clients generate some savings toward their first home at the same time as paying off debt.
“If you had $8,000 or somewhere close to that, you would save about 30 per cent in taxes. So, that would get you a $2,300 or $2,400 [tax] refund,” that could then be used to pay down the student debt, he says.
Reconsidering repayment period
As for those who qualify for the now interest-free Canada Student Loan program, there may be some wiggle room with payments as interest isn’t accumulating, says Nico Wong, financial advisor and mutual funds investment specialist at BlueShore Financial Credit Union in Vancouver.
“With the interest-free [loan], you can almost [make] the minimum payment and address some of your other goals first,” he says.
“An alternate strategy is to take the maximum repayment period, which is 14-and-a-half years, and make your monthly payment quite small. Then, you can allocate the money that you would have put toward the student loan into something else,” such as an FHSA or RRSP.
He does admit this strategy is dependent on a client’s ability to pay the loan on time and in being comfortable with hanging onto the debt for longer.
“It’s about advisors knowing their clients, but also the clients knowing themselves,” Mr. Wong says.
Indeed, there can be some pitfalls with words such as “interest-free” loans, Mr. Wong says, as the client still needs to be made aware that the principal needs to be repaid in the allotted time or there will be consequences in their financial future. (A loan is deemed in default when in arrears for more than 270 days, or roughly equivalent to missing nine monthly payments.)
“Advisors need to stress to clients that this is a line item on a credit report and failure to pay it could impact future borrowing power,” he says.
For more from Globe Advisor, visit our homepage.