The True Cost of Student Loans

by Tax Guy - Burlington Accountant on September 8, 2009 Print This Post Print This Post

If you have taken out student loans to fund your post-secondary education, you may be entitled to federal and provincial tax credits that can reduce the overall cost of your student loans. The true cost of student loans is not the state rate of the loan but rather the after-tax cost of borrowing.

Student loans that were advanced under the Canada Student Loan Act, the Canada Student Financial Assistance Act, or a similar provincial or territorial law may entitle you to a tax credit for the portion of interest you paid in the loans.education-funding

No Credit For Private Loans

If you obtained a loan to fund your education directly through your bank or received a loan from your parents, you will not be able to claim the interest as a credit. In addition, if you consolidate other loans with your student loans, you will lose the special tax treatment.

What Is The Tax Credit Worth?

At the federal level you will receive a tax credit of 15% of the interest paid on your student loans and the provinces offer similar credits. The value of the credits reduce your effective rate of your student loans.

For example, a resident of Ontario with a student loan with a stated rate of 7.5% will be entitled to tax credits totalling 15% federally and 6.05% provincially. The credits reduce the cost of borrowing by 21.05% and the after-tax interest rate on the student loan is only 5.92%.

When To Consolidate Your Student Loans

If you are able to obtain a loan for less than what you currently pay on your student loans, consider consolidating. Keep in mind that you need to consider the after-tax rate and considering the above example, you should only consolidate your student loans if the rate on the new loan is less than 5.92%

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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