Canadian university graduates are entering the workforce drowning in student-loan debt. Advisors who have a solid grasp on the ins and outs of these loan programs are likely to find themselves with both satisfied clients today and solid prospects for the future.

But in order to give the best advice, it’s important for advisors to understand how the highly specialized student-loan repayment program works, says David Ablett, a senior tax and retirement planning specialist with Investors Group Inc. in Toronto. Such knowledge, he says, “is a very valuable tool.”

There’s no doubt that student-loan debt is a growing concern in Canada. The average debt load in 2006 for a student completing a Canadian undergraduate degree was slightly more than $24,000, according to a recent study by the Millennium Scholarship Foundation.

And a study released in June by the Office of the Superintendent of Financial Institutionson the future of the Canada Student Loan program forecasts that in the next 25 years: university and college tuitions will triple; more than half the student population will have a Canada Student Loan; and more than three-quarters of loan recipients will be at the maximum amount available.

“Debt loads are certainly on the increase,” says Bradley Roulston, a certified financial planner with Mississauga, Ont.-based Roulston Financial Group.

From a financial planning perspective, the objective of student debt management is not always as simple as “just pay it off.” As with any financial advice, the solution will depend on the client’s individual life goals. “Some people just hate debt and can’t sleep at night,” says Roulston. “Others might save for a house.”

In the former case, the client can focus on paying off the student debt using an accelerated payment plan; in the latter, Roulston advises clients to pay the minimum balance in order to maintain a good credit rating, then focus all other savings on a down payment for a home.

With either option, Roulston says, it’s important to avoid the temptation to consolidate a client’s student loans with other debts. The main benefit of keeping the loan with the government is the 17% non-refundable federal tax credit on the interest paid on student loans. There are also provincial credits that vary by province.

If the graduate doesn’t need to claim all of the interest in the year it is paid, it can be carried forward and claimed within the following five years. However, only the graduate can make this claim, according to Canada Revenue Agency rules, even though a relative may have made the payments.

On federal student loans, the interest rate is prime plus 2.5%, or there is an option to lock it in at prime plus 5%. Rates on loans from provincial governments range from prime plus 1% to prime plus 2.5%. A bank could tempt a client with an interest rate that seems better, but the savings may be reduced by losing the tax credit.

Under the student-loan repayment program, debts must be paid off — barring special considerations — within 10 years of graduation. A commercial loan with a longer term would mean lower payments, but the loss of the tax credit should always be factored into the decision, says Ablett.

Taxes are important to consider when it comes to repayment schedules. “Making an RRSP contribution may be a good thing,” says Sucheta Rajagopal, a CFP and investment advisor with Hampton Securities Ltd. in Toronto. “Because then the client saves the taxes and, if there is a tax refund, can make a lump-sum payment into the loan.”

Rajagopal likes to use a cash-flow analysis with student loan-swamped clients. “Sometimes they are spending a lot of money at Starbucks or on a cellphone,” she says. “Oftentimes, they’ll find that there’s easily an extra $100 a month or sometimes much more that can go into those payments.”

Dealing with student-loan debt can be a family affair. Doug Lamb, a CFP and chartered accountant with Spera Financial Inc., an affiliate of Dundee Private Investors Inc. in Toronto, recalls meeting with the daughter of an established client. “She was heavily in debt, including student loans,” he says. “She came to me and we worked out a budget, listed all her debts and divided up the repayment schedule.” Both father and daughter were satisfied with the results.

@page_break@Filing for bankruptcy was once a popular option for graduates looking to erase student-loan debt. However, in 1988, the rules changed with the Higher Education Funding Act, and student loans could be discharged under bankruptcy only if the person had been out of school for more than 10 years. A July 2008 amendment to the Bankruptcy & Insolvency Act has reduced that period to seven years. If a client has ceased to be a full-time or part-time student for seven years when he or she goes bankrupt, the student loan will now be discharged.

From a long-term business-building perspective, taking the time to work with recent graduates — be they offspring of current clients or brand new prospects — can lead to opportunities. Children of well-established clients are likely to come into money. “Those are the people who are going to inherit that money, and you want to have a good relationship with them,” says Rajagopal. “I know advisors who had their relationship with the older generation and then, when that money moved down, they lost that money.”

A solid education is also often the basis for success in life. “You’re dealing with a person who is a university graduate, who hopefully is going to start building a career,” says Ablett. “They are well educated, and now they also have that discipline for saving.” IE