Graduation: Freedom, Excitement, and OSAP

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Well its that time of year again. Spring is in the air, patio season has engulfed every downtown core, and new graduates are celebrating the completion of 4 long years (or more, let’s be honest) of their undergrad.

The thought of moving onto the next chapter of any graduate’s life is definitely exciting. Some will jump right into high profile corporate positions, earning a significant income right out of school. While others may decide to back pack across Europe, or move to a new country, gaining new experiences. All great choices. Hey, after all those long nights studying, you deserve it!

There are some things to consider though. One of which is repaying OSAP for those Ontario students out there.

OSAP: What happens after graduation?

You may have heard that you have a 6-month “grace period” after graduation before you have to start paying back your OSAP student loan. This is true. You do not have to begin repaying the principal amount of your student loan until the the end of the 7th month after graduation. Furthermore, the interest on the Ontario part of your loan will not start being charged until after this grace period. However, you will be begin incurring interest on the federal portion of your loan as soon as you graduate.

So how much do you have to pay?

Well that depends on the size of your loan, the amount of time you wish to take to repay the loan, as well as on the interest rate.

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Repayment Amount

If you qualify for the Ontario Student Opportunity Grant (OSOG), which you are automatically considered for when you apply for OSAP funding, then the maximum principal amount you are required to repay annually for a two semester year is $7,500, or $11,250 for a 3 semester academic year. These repayment amounts are always changing so ensure to check the OSAP website for up-to-date information.

In order to qualify for OSOG you simply need to have received a Canada-Ontario Integrated Student Loan(s) (a.k.a an OSAP loan), you must have been enrolled in a full-time course load for two semesters (or for three semesters) without dropping out of that full time course load. You must have also received a Canada-Ontario Integrated Student Loan (COISL) greater than $7,500 for two semesters of study or greater than $11,250 for 3 semesters of study.

There is interest on this amount though.

The interest charged on the repayable portion of your OSAP loan is the prime rate plus 2.5% for the federal part of your loan, and the prime rate plus 1.0% for the Ontario portion.

Huh?

Essentially the prime rate is the interest charged by commercial banks to their best corporate clients. Why this matters to you is because the prime rate becomes the base rate in which all other loan rates are compared. In other words, your mortgage rate if you have one, or your OSAP funding rate is all dependent on the prime rate.

The current prime rate is roughly 2.7%.

It is important to keep in mind that your OSAP loan interest rate is a flexible rate.

“So what?”

Well, this means that in a period of low interest rates, or a low prime rate, your loan interest is also low. Great!

However, if the prime rate increases in the future then your student loan just became much more expensive!

Moral of the story…

Take advantage of this low prime rate and try to budget and repay your OSAP loan as quickly as possible so that you are not hurt by an interest rate hike down the road.

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Repayment Period

You are able to repay your OSAP loans as quickly or as slowly as you wish up to 15 years. This does not mean take 15 years. The average payback period is around 9.5 years. This is a reasonable time period, however the one thing you will want to consider when deciding on a target repayment period is the opportunity cost of your money. Every extra year that you are stuck paying down the principal plus interest is a year that you lose saving money in an RRSP or TFSA with compounding interest.

Let’s run through a quick, simple example of how significant this opportunity is to your savings. For a general situation, let’s say that the amount you have to repay once you graduate is the two semester OSOG amount of $7,500 for each of your 4 years of study plus interest. That’s a total principal amount of ($7,500*4) $30,000. Now, to keep things simple we will assume an interest rate of 3.5% and that you wish to pay back the loan in 9 years.

Stick with me here.

Your monthly payment would be roughly $362. After considering the Student Loan Interest Tax Credit, this loan would cost you about $3,989 per year. The total cost of this loan would be approximately $35,901, over 9 years.

Now, let’s take a look at the cost of the same loan except with a pay-back period of 15 years.

Your monthly payment would be more affordable at $257. Also, after taking into account the Student Loan Interest Tax Credit, the loan would cost you about $2,722 annually. However, in total this loan would cost you approximately $39,288, over 15 years.

The nominal difference between the two totals is $3,387.

“Big deal, I would rather pay $257 a month!”

Remember to consider the opportunity cost though. If you re-payed your loan in 9 years and then invested $3,387 into a Canada equity index fund that had a conservative average annual return of about 4% then you would end up with roughly $4,286. Thus, paying the loan back in 15 years is really costing you $4,286 more than paying the loan back in 9 years.

If you payed off your loan in 9 years and invested the $2,722 (the annual cost of the 15 year loan) annually for the extra 6 years you would receive an increase on your investment of roughly $2,445! In other words, not only would you save $3,387 off the total amount relayed on your loan, you would also earn another $2,445 from investing those savings!

To summarize…

The main point is to pay down your student loan debt as quickly as you can for 3 reasons:

  1. Prolonging your repayment period on your OSAP loan will increase the amount you have to pay in interest
  2. Flexible interest rates on your OSAP loan can increase drastically in the future. Take advantage of the current low rate period by paying back your loan quickly.
  3. Paying down your loan quickly will free up investment cash quicker, which can be invested to earn compound interest. This extra investment income can be put towards your first home or even towards retirement. The longer you hold onto those OSAP repayment savings, the greater the effect of compound interest!

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Every Ontario student’s OSAP loan is different.

How much is a grant?

How much is a loan?

Do I Qualify for the Ontario Student Opportunity Grant?

What portion of my loan is subject to the federal interest rate and what portion is subject to the provincial rate?

How much can I budget per month in order to re-pay my OSAP loan as quickly as possible?

These are all questions that all Ontario students who receive OSAP funding should be asking. Especially if you just graduated because you are already incurring interest on the federal portion of your loan.

Don’t be intimidated!

Although it is a BIG reality check when you realize you have to repay some of those funds that you spent on tuition, books, and a little too much on the campus pub, it is not an impossible task. Not in the slightest. With proper planning, answering the above questions, and building a budget based on what YOU’RE comfortable with you should be able come up with a payment plan to repay your loan quickly, while reducing the stress involved with student debt.

 

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Additional information

 

For more information regarding OSAP check out the links below:

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