Reduce Student Loans Using Tax Credits

Reduce Student Loans Using Tax Credits

Tuition increases faster than inflation, and the rates are soaring to the heights of the Ivory Tower. Meanwhile, provincial debt is increasing to the point that Ontario puts more money to interest payments on government debt than it does to postsecondary education. Universities are grappling with underfunded pension plans. Tuition is likely to remain high.

There are tax credits that come with inflation, but they are around a max of 17%. Students who earn enough to use the credit gain a 17% tax credit. The rest may be carried forward to future years. The student may transfer $5,000 to a parent or grandparent regardless of living arrangements or age. However, the relative’s credit usually is not the same as if the student were using the same tuition for credit.

Still, the tuition tax credit may be useful for the whole family. Transfer of $5,000 in tuition to a parent will save the parent tax money. That money can be used towards the next year’s study, or kept, or given to the graduate.

Student loans come with massive interest rates. At 4% interest or more, the student learns a harsh lesson in credit. Interest rates may be found here.  Making a deal with the graduate to put tax credit savings towards the loans would help.

Here’s the deal: Find out how much transferring $5,000 in tuition will decrease your taxes. Offer to take $5000 in tuition from the student (they have to sign that over in a simple legal CRA form). Take that number and offer all of it to the student with an agreement that the money will be fully used to pay down the debt. The student doubly wins as the debt is paid down and interest fees on that paid debt disappear. And, the student learns a little more about money management in the transfer. The parent breaks even assuming they don’t borrow themselves to give to the student. It maximizes the benefit of the credit to the family.

For more information about your particular case, talk to your tax accountant. Background reading may be found here: