Should you refinance your government student loans as a line of credit?
This is an individual choice and it is recommended that you obtain independent financial advice to explore the best loan repayment options for you. Upon graduation, one option may be to refinance your government student loans as a line of credit through a bank. Please note that once you pay out your government student loans you cannot change your mind after the payment is complete.
Listed below are some advantages and disadvantages of refinancing to a line of credit/personal loan along with a sample calculation. This is not meant to be an exhaustive list.
Advantages
• Possibility of more flexible principal repayment terms being offered by your bank
• Interest expense savings if your bank offers a lower interest rate than that being charged on your government student loans
• Ease of having one monthly payment
Disadvantages
• May cause you to reach the bank’s lending limits, restricting your access to additional credit from your bank
• Eliminates your ability to apply for government student loan reduction, deferment, forgiveness and interest relief programs that are offered through the federal and provincial governments
•If you take longer to repay your student debt due to more flexible repayment schedules offered by your bank, you may end up paying more interest over the course of your loan repayment
•Loss of your tax credit for interest paid on government student loans
Sample Calculation
The following calculations detail an example of the potential interest costs and tax credits under two options: The first maintaining the debt as a government student loan and the second as refinancing this loan with your bank while maintaining the same payments that would have been due under the government student loan requirements.
This calculation assumes that the bank’s interest rate remains at prime and does not increase after graduation or residency.
Maintaining your student loan as a government student loan:
| Loan Amount | $50,000 |
|---|---|
| Term in Years (Months) | 10 (120) |
| Monthly Payment | $580 |
| Interest Rate (government’s floating rate of prime plus 2.5%, assuming a prime rate of 4.5%) | 7.0% |
| Total interest paid over the term of the loan | $19,665 |
| Less Federal Tax Credit (16% of interest paid) | ($3,146) |
| Less Provincial Tax Credit (6.05% of interest paid) | ($1,190) |
| Net cost of interest paid over the term of the loan | $15,329 |
Refinancing your student loan with your bank:
| Loan Amount | $50,000 |
|---|---|
| Term in Years (Months) | 8.6 (104) |
| Monthly Payment | $580 |
| Interest Rate (assuming a prime of 4.5%) | 4.5% |
| Net cost of interest paid over the term of the loan | $10,475 |
| Net Savings from Refinancing | $4,854 |
Under these circumstances, you could achieve net savings of $4,854 if you were to refinance your student loans with your bank.
If you are interested in discussing the possibility of refinancing your government student loans, contact your financial institution.
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