Setting the terms of your loan agreement…

Q. What is loan consolidation?

A. This has a special meaning with student loans. When you sign your student loan agreement, all of the same type of loans from your studies are brought together (consolidated) into one repayment plan.

For example, if you cashed a Canada student loan every year for four years, all four loans will be rolled in together so you only need to make one payment for these outstanding loans. If you also got BC student loans, they would all be rolled into one so you'd make only one BC loan payment.

Remember that you'll need to make separate payments on each of your 'consolidated' loans unless your province has integrated federal-provincial student loans.  At writing, the provinces with integrated loans are Saskatchewan, Ontario, New Brunswick, and Newfoundland/Labrador.

If you're unclear about anything, ask your lender exactly what you need to do. It's easier than having problems later.

Q. When do we sign our loan consolidation agreement?

A. Normally, consolidation occurs on the first day of the seventh month after your period of study end-date. You may be asked to sign the agreement before that date.

Q. Does anything else happen during loan consolidation?

A. During loan consolidation, your loan also switches to 'in payment' status, so you're now expected to either maintain monthly payments or arrange for interest relief.

You also choose whether to choose a fixed or floating interest rate for your loan. See the FAQ below.

Q. I have to pick either the 'fixed' or the 'floating' interest rate on my student loan consolidation agreement. What's the difference?

A. The fixed rate won't change over the life of your loan payments. The floating rate will go up and down to follow changes in the prime rate, which is a basic borrowing interest rate set by banks, a little higher than the current Bank of Canada rate.

Because fixed rates mean you know the cost won't get any higher, they come with a higher premium over the prime rate. The Canadian government charges Prime + 2.5% for floating student loans but fixed student loans are set at Prime + 5%. This makes Canada's fixed interest student loans among the most expensive student loans in the world.

When it comes to provincial student loans, some provinces charge the same rates as the federal government and some charge less. But even if they charge less overall, they always charge that higher premium for fixed rate loans.

Q. Okay, but which is a better deal, fixed rate or floating?

A. You'll have to decide, based on your own situation. But here are some considerations to help you look at this strategically: 

With the fixed rate, you know exactly what interest rate you'll be paying until the loan is paid off. It's nice to have certainty.

However, to pay for that certainty, you have to commit yourself to a higher interest rate at consolidation (as high as Prime + 5 instead of Prime plus 2.5).

On the positive side of fixed rates, interest rates at writing are relatively low [Ed note: this was written before the 2023 hikes in interest rates. Prime has since gone up.] with a 4% prime rate. That would guarantee 9% interest for your loan (Prime + 5) until it was paid off. Since prime interest rates in some decades go above 15%, a fixed rate of 9% may not look bad if your main concern is certainty.

In the current economic climate, there's no way to tell if interest rates will go even lower in coming years or if it will shoot up due to the inflation from higher oil prices and other factors. However, with the pressure of recession, it seems likelier at this point that interest rates will stay moderate, perhaps going even lower. 

This would argue for taking the floating interest rate. If interest rates stay low, you could save hundreds or even thousands of dollars by choosing to pay your loan at a floating rate of prime + 2.5 percent.

Here's a final consideration. How long do you think it will take you to pay your loan?

If you think you can pay it in a few years, you're taking relatively little risk by choosing the floating interest rate because it would likely take a few years for the prime interest rate to go high enough to overtake your initial interest savings.