Being handed a chunk of money may seem great at first, but before you sign on the dotted line, do your homework. Government loans vary significantly from bank loans and confusing the two can have serious consequences.

How to Apply

Speak to a financial aid officer at your college or university first. They can guide you through the process and answer any questions about filling out the complicated forms. Since government loans are based on demonstrated financial need, some of your expenses might not be covered. When calculating your loan, other sources of financing are factored in, including personal savings or money from a Registered Education Savings Plan. The purpose of a student loan is to supply only what you truly need, so don't count on extra money for beer.

In general, Money you borrow from the government comes from two different sources: the federal government and the provincial government. The federal component is administered by the National Student Loans Service Centre, and lends up to 60 percent of required financing. The remaining 40 percent comes from your provincial government.

To apply for a bank loan, speak to a financial representative at your bank, as all banks have their own policies. Financial aid officers at your school cannot help you.

What's a Guarantor and why do I need one?

Full-time students however, are given a break with government loans. To qualify for both federal and provincial loans, proof of enrollment in a full-time program is enough. British Columbia is the only exception: a guarantor has to sign if you are under the age of 19. By signing, the guarantor agrees to repay the loan if you can't.

It's likely a guarantor will be needed for a bank loan since most new students don't have enough credit history to qualify for a bank loan on their own. On the other hand, bank loans are approved based on a combination of three factors: your personal credit history, the credit history of the guarantor, and the type of program you're enrolled in. Students enrolled in medical school or certain master's degree programs are considered a lower risk from a lender's perspective, because they are more likely to find work upon graduation and pay back their loans on time. As a result, loans from banks are more accessible to them.

What is Interest?

Loans aren't free. When lenders issue a loan, they charge an interest rate. Interest is a percentage of the original loan amount (also known as the principal, in financial lingo), and is applied over the course of the repayment period. With government loans, full-time students are given an interest-free grace period for six months after leaving school. Most bank loans on the other hand, require you to start making interest payments as soon as you draw money, whether you're still in school or not.

What if I don't find a job after I graduate?

The government is more flexible if you run into trouble after completing you studies. They offer repayment assistance, meaning they'll make payments on your behalf. Banks are stricter and may not be able to offer other arrangements. Remember that late or missing payments will affect your credit history negatively. A blemish on your record will create barriers for getting credit when you want to buy a house or car in the future. Don't forget that once a loan is signed for, the responsibility of paying it off rests on your shoulders.

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