Uncommon cents: Tax and loan tips for students

As a student, you probably feel like you have so much school work coming at you in March that other concerns get put aside. Taxes are one such concern — but you should begin to pay close attention to taxes so you can reduce or defer them.

You pay taxes in the province in which you were resident as of Dec. 31 of the year in question. For example, as students at UVic on Dec. 31, 2012, you would do your taxes for that year as a resident of B.C.

Income is all the money you make in a year and must be declared, including any monies received from a fellowship, bursary, a prize for achievement or a scholarship.

There are a number of legitimate deductions of which students can take advantage, the most obvious one being tuition and textbook tax credits. Others include credits for moving expenses to start a business or go to school, as well as childcare expenses. Money received from bursaries, fellowships or scholarships is tax-exempt if the student is in full-time study and is eligible for the education tax credit. Part-time students may have a portion of any such awards tax-exempt in the year that they are received by the student. If a student does not qualify for the education credit (part- or full-time), they could still be eligible for a $500 credit on scholarship money, but the rest might be taxable. The good news is that most students are eligible for the education credit.

Another tax credit for students to take advantage of is the employment credit, which is available to all Canadians and is a credit for the first $1 000 earned in the year.

One other critical issue for students, as you all know, is student loans. In Canada, we have something of a patchwork quilt with respect to student loans. In terms of taxes, you can receive a 15 per cent credit on the interest you pay on student loans.

As for managing your loan beyond tax time, the website canlearn.ca is the best source for you to see where, when and how to make payments for your loans. There is also information about what happens when you can’t pay the loans back for a time. See, for example, the Repayment Assistance Plan (RAP).

Whether you are a full-time or part-time student, you will have to begin paying back your loans six months after you graduate or leave school (the repayment status will also begin if you switch from full-time to part-time studies). The interest will accumulate during this period. You can choose either a fixed or floating rate for repayment. The fixed rate is a stable prime rate plus five per cent, while the floating rate is a variable prime rate plus 2.5 per cent. The prime rate is what banks have as a base lending rate; right now it is three per cent. A fixed rate is what you pay without any concern if the prime rate goes up; a floating rate is one that rises or sinks according to market flows. So, if you were to choose a fixed rate repayment now, you would pay eight per cent, while the initial floating rate would start at 5.5 per cent (but the floating rate could change several times per year).

There are strategies for handling so much interest. Work with your loan provider and make use of government resources to manage your loan. During the six-month period after you graduate, plan to pay down as much as you can. Get a lower-interest personal loan, especially if you have the eight per cent fixed option in place. You may need to have a third party co-sign such a loan for you, which can be difficult and financially risky for both the student and the co-signer.

What I must emphasize is this: pay down your debt as quickly as possible. Forego the extras as far as you can. Though it may well be unfair that the journey into careers after university or college is burdened by a heavy debt load, your ability to pay it off as quickly as possible will earn you a good credit score and will emphasize the hard lesson that some people don’t learn for a long time: that debt can be good. But if debt is allowed to get out of control, it can hamper your ability to grow your assets and live the life you would like.

In the next column, I will further explore the concept of personal loans and how they might help you pay down your student debt faster and more efficiently.

 

For more detailed information on taxes, visit cra-arc.gc.ca.

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