Another school year is about to begin. And another group of young Canadians are considering their student loan options.
Last year, average undergraduate tuition fees were just under $ 6,400, a figure that keeps rising each year much faster than salaries, according to Statistics Canada. Medical and law students were required to pay fees in excess of $ 10,000 per year, while undergraduate dentistry students were required to pay $ 21,000 per year.
READ MORE: University tuition fees in Canada increase 40% in a decade
It’s no surprise that student debt continues to rise as well. According to the Canadian University Survey Consortium, the average debt-ridden student in the Class of 2015 carried a charge of $ 26,800.
WATCH: Our consumer reporter Anne Drewa has some timely advice for post-secondary students on how to avoid accumulating too much student debt.
Keep student debt under control
With the numbers – and the fact that interest rates in Canada have started to climb for the first time in seven years – why not look for the cheapest loan?
Student lines of credit offered by private financial institutions, including the country’s major banks, often offer significantly lower interest rates than government student loans.
Canada student loans have a fixed interest rate of prime plus 5%. If you choose a variable interest rate, you are considering a prime rate plus 2.5% (the prime rate is currently at 2.95%, according to the Bank of Canada).
Compare that with the RBC Student Line of Credit, which charges the prime rate less 0.25 percent. And you get two years after you finish your education before you have to start repaying the loan.
At TD, undergraduates can get a line of credit at exactly prime and can make interest payments only while in school and for the first 12 months after graduation.
You got the idea.
So why would anyone go for a government loan?
Not so fast. Students who take private credit are often unaware that the interest they would pay on government loans is tax deductible, tax experts told Global News.
“The interest rate [on government student loans] can be claimed as a deduction from income, which reduces the income you have to pay tax on, ”said Lisa Gittens of H&R Block.
READ MORE: 6 Tax Credits & Deductions That Can Save Students (And Their Parents) A Bundle
If you don’t have any income in a particular tax year (as many recent graduates can), you can defer that tax deduction for up to five years, according to Gittens.
This is not the case for private loans and lines of credit, however, she added.
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According to the Canada Revenue Agency, even consolidating your student loans into a line of credit will exclude you from the tax deduction.
Bundling multiple government loans into one low-interest line of credit is becoming increasingly common, Gabrielle Loren, a Vancouver-based CPA, told Global News in March.
“Banks will literally set up tents on campuses to entice students to take out lines of credit,” she told Global News.
Banks especially like law and medical students, who often graduate with six-figure student debt, but also with a good chance of earning six-figure salaries.
Plus, private student loans can come with flexible repayment plans, but Canadians don’t have to pay off their Canada student loans before they start earning at least $ 25,000, Gittens noted. The change was introduced by the Trudeau government in 2016.
And borrowers who are having trouble making their monthly Canada Student Loan payments may be able to get approved for a reduced monthly payment or for no monthly payment.
READ MORE: Ottawa cancels $ 178 million in student loans
Some students may still be better off with a line of credit, especially if they expect to start earning a good salary right after graduation, Gittens said.
But students should do the math before choosing between a private or government loan, possibly sitting down with a financial planner to see how the different post-graduation scenarios would play out, she added.
The best loan is not necessarily the one with the lowest interest rate.
© 2017 Global News, a division of Corus Entertainment Inc.