How does OSAP work? How can I pay it off? We make it make sense

How does OSAP work? How can I pay it off? We make it make sense

#MakeIsMakeSense is a weekly series from the Star that breaks down personal finance questions to help young Canadians gain more confidence and understanding around financial literacy.

Managing student loans can be a looming stress among young people in addition to juggling academic, work and personal responsibilities. When it comes to tackling personal finances, education expenses are at the top of many Canadians’ minds.

This week, we’ve received a few questions on student loans, from how the interest percentage works, to if students can start investing while receiving financial aid.

To #MakeItMakeSense, we brought in money expert Jessica Moorhouse to break it down and give us tips on how to approach student loans.

How are loans and grants calculated? What are some ways those amounts are impacted?

OSAP is calculated based on each individual’s financial need, not everyone who applies is approved and not everyone is approved for the amount they want, says Moorhouse, adding prior to applying, people can check out the OSAP Aid Estimator.

To determine your eligibility and amount, factors include education expenses, full-time or part-time student enrollment and family income.

Another aspect that can affect your approval and the amount you receive is how much money and investment you already have.

“Remember, OSAP is to help students in financial need. If you have enough assets to cover your financial need, you may not be approved or only approved for a minimal amount,” Moorhouse said.

These assets include:

– The savings portion of all bank accounts, including checking accounts, tax-free savings accounts and foreign bank accounts

– Guaranteed Investment Certificates (GICs)

– Canada Savings Bonds (CSBs), provincial savings bonds or corporate bonds

– Inventory

– Term deposits

– Treasury bills

– Mutual funds

– Trust funds (withdrawals/payments, interest or dividends)

– Awards/settlements for economic loss (past or future loss of income) or income replacement benefits or for punitive damages

Luckily, there are assets that won’t affect your eligibility or approval amount. These include:

– Registered Education Savings Plans (RESPs)

– Registered Disability Savings Plans (RDSPs)

– Registered Retirement Savings Plans (RRSPs) and other retirement accounts

– The value of your principal residence and any other owned real estate

– Clothing, furniture or personal belongings

– Awards/settlements for non-economic loss and/or pain and suffering

– Savings through the Ontario Child Benefit Equivalent program

Do loans count as income?

Student loans are not considered income, Moorhouse explains.

“Just like how getting a personal loan from the bank you have to pay back wouldn’t be considered income. You can however claim the interest you pay on your student loans as a deduction to help lower your tax bill,” she said.

If a student wanted to start investing while they have student loans, how could they approach that?

Investments in retirement accounts like RRSP shouldn’t impact OSAP as people do not have to report that on their applications, Moorhouse says. But if students have an investment in a TFSA or taxable account, then those assets will have an impact.

“So, if a student did want to start investing and not have it affect their OSAP, doing so inside an RRSP or investing in real estate, since that’s another asset you’re not required to report, may be better options,” said Moorhouse .

How does repayment work and what about the interest percentage?

Six months after your study period ends, you need to start repaying your OSAP loans. Grants do not have to be paid back.

“This means you have a six month grace period after you graduate or leave full-time studies, which will hopefully be enough time for you to secure employment and earn an income to pay back your loans with,” said Moorhouse. “That being said, you’re also allowed to make payments while you’re still in school or during your grace period.”

In terms of what interest rate you’ll be paying, for the provincial portion of your loan it will be: Prime rate plus 1 per cent. This is a variable way, and there is no fixed rate option for the Ontario portion of your loan, she says.

On the federal part of your loan it will either be prime rate plus 0 per cent, if you choose a variable rate, or prime rate plus 2 per cent if you choose a fixed rate. Currently the prime rate is 2.45 per cent.

“That means you could be paying 3.45 per cent on the Ontario portion, and either 2.45 per cent or 4.45 per cent on your Canada portion,” said Moorhouse.

While the accumulation of interest on federal loans has been suspended for now, what are ways post-secondary students can prepare to make payments back?

Effective April 2021, the federal government put a suspension on the accumulation of interest on Canada Student Loans until March 31, 2023. However, this does not include the provincial portion of your loan.

“There is currently no freeze on interest from the Ontario portion of your loans. Moreover, during your 6-month grace period, interest will start to accumulate on the Ontario portion of your loan,” Moorhouse explained.

But there’s good news. “Even without the current temporary interest rate freeze, interest does not accumulate during the 6-month grace period on the Canada portion of your student loans,” she added.

This being said, Moorhouse emphasizes it’s still important to make all of your student loan payments and if people can afford to, maybe make some extra payments.

“With the interest rate freeze and grace period, this gives you an opportunity to make a dent in the principal of your loan, instead of some of your payment going toward interest too,” she said. “In other words, this could be one way to pay off your student loans quicker. And the sooner you pay off your loans, the sooner you can free up some significant monthly cash flow which can go toward other savings goals and other important expenses.”

When it comes to preparing to pay back your student loans, Moorhouse says the best thing you can do is take a look at your current payoff schedule.

“Typically your payments are based on a 9.5 year payback schedule, and then play with the repayment calculator to figure out how much you can reasonably afford to pay extra on your regular payments to pay them off quicker,” she said.

“Although everyone’s situation is different, making it a priority early on to pay off your student loans won’t ever be something you regret because it can be quite the emotional and psychological burden to carry around.”

Additional tips on student loans

Paying off your student loans can actually be a big boost to your credit scores, says Moorhouse.

“Your OSAP loan payment activity is reported to the credit bureaus and is part of your credit history, meaning that if you prove to be responsible with paying back your student loans, your credit scores with Equifax and TransUnion will improve,” she said, adding that it can be important if you want to get student loans or a mortgage in the future.

Moorhouse adds if a student is having difficulty repaying their loans, they can apply to the Repayment Assistance Plan for assistance with either interest relief or debt reduction.

Got a question or scenario that you’d like to see tackled? Reach out to Madi via email madisonwong@thestar.ca and we’ll #MakeItMakeSense.

Jessica Moorhouse is an Accredited Financial Counselor Canada®, host of the More Money Podcast and founder of financial education company MoorMoney Media Inc.

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