Student loans are an inevitability for many. Especially when pursuing multiple degrees like a medical, dental, business or law degree. Luckily, in these types of programs the banks tend to be quite generous with providing lines of credit to help. However some of you will also qualify for OSAP or other provincial government loans.
During school, OSAP does not require interest payments on the debt. For this reason, it is preferable to use as much OSAP as they will give you before tapping into the bank lines of credit. However, after training OSAP will ask for repayment on the loans and interest starts to accumulate at the same time. The question I commonly get is – should I consolidate my OSAP onto my line of credit or keep it separate?
There are several considerations before making the decision:
- Do you have enough room on your line of credit to do this?
- What is the interest rate on your line of credit?
- What is the interest rate on OSAP?
- Do you qualify for any programs that excuse interest on the OSAP loans for a longer period? For example, medical residents qualify for the Resident Loan Interest Relief Program, which excuses them from principal and interest payments on government student loans as long as they practice in Ontario for at least 5 years following residency.
If we look at the current interest rate environment with prime being 2.7%, and assuming the answer to question 4 is “no”, then it makes sense to consolidate. OSAP currently has an interest rate of prime plus 2.5% (on the federal portion) or 5.2%. The tax credit you receive is worth 20.05% of the interest paid. As such, it is worth consolidating as long as prime at the bank is at least 20.05% less than the interest rate on OSAP.
Every government student loan program is different. It is always advisable to understand the offers, interest rates and tax credits available in your province before making this decision. Even when you live in Ontario, you should revisit this decision as interest rates change.