Canadian Student Taxes 101: Loans

If you’re a student in Canada in the coming year, finances must be on your mind in one way or another. You’re not alone, as many students are looking into the different finance options and their needs at this time. Getting your student finances in order will help now – and in the future.

Getting organized now will make life easier later.

Jonathan carter, CPA, CMA, CPB

As a post-secondary student, this new stage of life requires more responsibility and organization than before. Getting organized now will make life easier later. Build good habits now that will help you through your schooling and for the rest of your life. We walk through some critical things to help you make the right decisions for yourself, and we start with loans. Subscribe at the end of this post to be notified of the next instalments in this new series.

Getting Funded – Student Loans

Student loans fall into two main categories: government-funded student loans and bank student lines of credit. Although getting student loans is often relatively straightforward, there are certain things that you’ll need to apply for. For instance, you’ll need your taxes up to date – and so will your parents. The requirements for both new and mature students of higher education are different; however, all will still need their current taxes.

Government Student Loans

Government student loans, such as OSAP (Ontario Student Assistance Program), require an application and are not granted to everyone. This program is intended to provide funding for tuition, books, and other academic and living expenses for students who meet specific household income thresholds and don’t possess different means to pay for schooling, like a Registered Education Savings Plan (RESP). Applying for a government-funded student loan requires certain things, such as attending a qualifying school. Review the requirements before applying for one. These loans provide interest grace periods and a lower interest rate than most private loans and have repayment assistance programs.

Government student loans differ from bursaries or scholarships in that you need to factor the repayment of your student loans into your financial plan shortly after graduation. If you owe money and are supposed to repay your government loan, the Canada Revenue Agency (CRA) may send any tax refunds to that department instead. Government loans appear in your credit report, and your monthly payment history is reflected. It’s essential only to borrow what is needed and not more (as students are often tempted to do). Create a plan to pay back the debt without derailing your credit after graduation; a good accountant can help you.

Bank Student Loans

All banks try to entice students to take loans from them early in their academic careers. The student market can be highly profitable. Human behavioural studies show that people don’t change financial institutions, so if you start as a student customer, you’ll likely stay with them your entire life. You’ll often see promotions directly geared toward students with low-interest rates and money-back offers.

Banks usually provide a student line of credit instead of a fully-funded loan. You’re authorized to borrow up to a certain amount of money. Usually, these are $5,000 to $8,000, but the interest doesn’t start until you’ve borrowed the money.

For example, let’s say you are authorized for an $8,000 line of credit and borrow $2,500 to pay tuition. You reduce the limit you can borrow to $5,500. The amount you borrowed will start to accrue interest. You’ll need to repay the amount borrowed plus interest. But when you repay a part of what you borrowed, the amount you can borrow will increase. So if you pay back the interest and $2,500 of the principal you borrowed, your borrowing limit will go back to $8,000. If you manage a student line of credit well, you can pay significantly less interest than borrowing the entire amount. You also build good credit by showing that you are responsible for using a small fraction of your available credit and paying it back consistently. But you need to take extra time to manage it; if you neglect it, it can cost a lot more than a government student loan.

Bank Loan Applications

The application process for a student line of credit from a bank is very similar to applying for government-funded student loans. There will be questions about your and your parent’s financial situation. They will want to see up-to-date tax returns from you and your parents.

These loans carry a higher interest rate than government-funded loans and don’t have many ways of helping you repay them or get interest holidays. Remember, the banks are making money, not helping you through your education. For this reason, it’s wise to use what you need and create a payment plan that works for you. Often, students pull out all the money to buy what they think is essential, but it’s a money drain with little return. 

Watch for Promotions & Ask Questions

Reading the fine print of any promotion offered to you as a student is essential. Some bank products are one-time promotional, and the deal can be good, and if it really is better than a government loan, why not take advantage? Just be careful, read the fine print, and take it to an advisor for comparison if you’re unsure. A good accountant can run the numbers and tell you which path is the most advantageous.

Whether it’s a cellphone plan or gym membership, ensure you get what you think you’re getting. Ensure you understand concepts like “Introductory interest rates” and “Introductory pricing” and understand your obligations before signing. What good is a 12-month gym membership if you’re only going to be in school for eight months of the year? Most importantly, make sure that what you’re getting makes sense for you. If the campus is a twenty-minute walk away, maybe you don’t need a gym membership at all and could get exercise for free walking to and from classes.

Starting on the Right Foot

Building your Credit by Paying it Off

Using revolving credit correctly is a great way to build your credit score. Never borrowing will give you a credit score of zero. Banks want you to borrow and then pay it back by the deadline. That’s how you build credit.

For example, let’s say you got a part-time job, a student cell phone plan, a student credit card and a student line of credit. Set things up so that the credit card automatically pays for the cell phone monthly. Then, set it up so that the line of credit automatically pays for your credit card every month. And finally, set up your part-time job paycheck to repay the student line of credit every month. If you work this plan well, you’ll always pay your bills on time, repay your credit card in full every month, never pay credit card interest, and keep the interest from your student line of credit to a minimum.

Budget Your Schooling

Many students come out of school in debt. It doesn’t have to be that way. Run a monthly or quarterly budget, and make sure your income is more than your expenses.

Tax Benefits

Students are entitled to certain tax benefits depending on their situation. Having a professional CPA tax accountant prepare your student taxes ensures that both you and your parents if they are involved, get all the student tax deductions you’re entitled to. The next post in this series talks more about student taxes; subscribe now below to be notified when it drops.

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