Evaluating the Pros and Cons of Utilizing Personal Loans for Student Debt Payment
In the modern era, as the cost of higher education continues its upward trajectory, the burden of student loan debt has become an increasingly pressing concern for fresh graduates. As they embark on their professional journey, this financial obligation looms large. Given this scenario, many are exploring the idea of taking out a personal loan to consolidate and pay off their student loans. But is this really a viable strategy? Let’s delve into the matter.
Grace Period: A Breather for Graduates
Government-issued student loans often provide a six-month grace period post-graduation, during which borrowers are not required to make payments. Interest, however, continues to accumulate. This period allows graduates to get their financial house in order before they start repaying their loan. Conversely, personal loans usually start accruing interest immediately and offer little flexibility in terms of repayment schedules.
Interest Rates: Fixed or Variable?
Government-issued student loans typically offer the choice of a fixed or variable interest rate. The fixed rate option provides certainty with a consistent monthly payment, although these payments can be higher. The variable rate, on the other hand, may result in some savings in the long run but is subject to market fluctuations, which might make budgeting a challenge. Generally, the interest rates for student loans are lower than those of personal loans offered by banks or private lenders.
Tax Benefits: A Saving Grace
The Canada Revenue Agency allows for a tax credit on the interest paid on student loans during the past fiscal year. If there is no tax payable in the current year, the interest can be carried forward and applied to a tax return in any of the subsequent five years. This benefit only applies to government-issued student loans and is not extended to personal loans.
Repayment Flexibility: A Lifeline for Struggling Borrowers
Many government-issued student loans offer flexible repayment options to cater to borrowers facing financial hardship. These options can vary from reducing monthly payments, extending the loan term, and even offering repayment assistance plans which provide partial loan forgiveness for low-income earners. Moreover, students who plan to return to school have the option to defer their student loan payments until after graduation. Such flexibility is typically absent in personal loans.
Entry Barriers: The Catch
Although personal loans do not require collateral, lenders usually impose restrictions on the loan amount and require the borrower to have a good credit score and stable full-time employment. Recent graduates often face hurdles, such as high outstanding debts (including student loans), entry-level wages, and a lack of credit history, which might make it challenging to secure a reasonable interest rate or a loan adequate to consolidate their debt.
The Right Decision: Evaluating Your Options
Debt is always an unwelcome burden, but when evaluated against alternatives, student loans offer a degree of flexibility and cost efficiency that is hard to find elsewhere. Hence, anyone considering replacing their student loans with a personal loan should first weigh the potential benefits they might be forfeiting.
Seeking Professional Guidance: Towards a Debt-free Future
If your personal loans, credit lines, and/or credit card debts are making it hard to manage your student loans, seeking professional advice might be the way forward. A Licensed Insolvency Trustee can provide a free confidential consultation to help understand your options and choose the one most suited for you. Although government-issued student loans cannot be included in a bankruptcy or Consumer Proposal for the first seven years post-graduation, addressing your consumer debts can be a significant step towards achieving financial stability.
In conclusion, while taking out a personal loan to pay off student loans might seem like an attractive proposition, it is important to understand the potential downsides. Before making such a decision, consider the benefits offered by government-issued student loans, such as a grace period, flexible interest rate options, tax credits, and flexible repayment plans, which might not be available with personal loans. Furthermore, securing a personal loan might pose challenges for recent graduates due to their financial status and credit history. Therefore, it is advisable to thoroughly evaluate all options and seek professional advice if needed.