Graduation from a post-secondary program can be an emotional time. You feel proud that your hard work has paid off, sadness from leaving the people and place that you’ve spent so much time, and excitement for what is to become during your journey into adulthood.
Fast forward six months and things begin to become a little less shiny and new. Maybe you’re working in your field of study, maybe you’ve taken the year to go traveling, or maybe you’re working a minimum wage job trying to make ends meet. Next thing you know the federal and/or provincial government or the bank that lent you your student line of credit come knocking for payments. This introduces or enhances another popular emotion among recent grads: stress.
According to Statistics Canada, the average tuition for a Canadian university — before the cost of books, travel and supplies — is $6,500 per year. This means while new students are worrying about gaining the freshmen fifteen, graduating students have to worry about gaining the post-degree twenty – as in the $26,000 the average Canadian graduate owes in student loans. Keep in mind this number doesn’t include any consumer debt, like credit cards and lines of credit, which the student might have also acquired over their time at school.
WHAT DEBT TO EXPECT
When you hear financial advisors talk about “student debt”, they are typically discussing two areas of debt that graduates tend to face:
- The repayment of their federal and provincial student loans used to fund their tuition, books and other student related expenses and,
- The repayment of a growing consumer debt, like credit cards and student lines of credit.
While grads might feel pressure to repay their student loans, this isn’t the only financial sore spot they have to worry about. Repayment of student loans can usually be managed under the government’s Repayment Assistance Program, which is paid at an interest rate lower than the interest rate charged on bank loans and credit cards, e.g., prime = 2.95% +5% (fixed) or +2.5% (floating). An average student loan interest rate is roughly 6-8% compared to the 19% or higher rate on credit cards. The real pressure comes from the growing consumer debt – averaging $18,000 – that graduates have to pay back on top of their student loans. The reality is that the overall debt a student may need to repay upon graduation could exceed $40,000.
ARE YOU IN FOR THE LONG HAUL?
The amount of time it will take to pay off student debt will depend on what you can afford and when you can afford it. Immediately upon graduating, there is a six-month grace period until you have to begin making payments towards your student loans; however, interest will still accumulate during that grace period.
To give you an idea of the numbers, if you can afford a payment of $530/month in your budget, it will take you 5 years to pay off $26,000 in student loans at a fixed interest rate (prime + 5%). If you can only afford a payment of $315/month, it will take you 10 years to pay off the debt under the same interest rate terms.
The reality is, it’s taking closer to 10 years for grads to pay off their debt as they experience challenges in finding the right job at the right pay, right away. Whether it’s due to the economy or a competitive workforce, some grads must work unpaid internships or minimum wage jobs which delays the repayment of their debt.
TIPS OF THE TRADE: PAYING BACK STUDENT DEBT
After you figure out how much you owe in total (this includes your government loans, credit cards and lines of credit), it’s important to prioritize the amount for each payment based on how much interest you’re being charged. Plan to put more towards the higher interest rate debt which will most likely be your credit cards. Your bank should have an online “loan” calculator which will help you figure out how much you owe. Once you have your debts organized, follow these helpful tips to keep your payments on track:
- Make your payments on time. Student loan payments will affect your credit report. Missing your payments or paying them late will impact your credit score and rating. It’s important to remember how your rating will make you look to lenders when you apply for future loans and/or mortgages.
- Practice “paying yourself first”. This might seem impossible while you’re paying down student debt, but having a cushion of savings for emergency expenses will help you avoid dipping into more credit. You might also want to increase your monthly payments as your income increases. Setting up a direct deposit to transfer payments to your student loan will ensure you stay on track with tackling the debt.
- Make use of the Repayment Assistance Plan (RAP) by contacting the National Student Loans Centre or your provincial student loan office.If you find yourself struggling to make payments, you may be eligible for a reduction on your monthly payments through the government’s RAP. If you qualify, your monthly student loans will be reduced or you won’t have to make any payments, depending on your financial situation.
- Don’t forget to claim a non-refundable tax credit on your income tax return for the interest paid on your student loans.
If you’re currently a student with a few years left in your education, it’s not too late to graduate with minimal or at least manageable debt. Be proactive and budget! Live within your means and seek out creative ways to live more frugally as a student, like using your circle of friends as a support network since they will more than likely be in the same boat as you. Seize opportunities to earn income during the spring and summer breaks and, lastly, avoid signing up for credit cards or lines of credit. Focus on managing the cash you have available.
Planning to maintain a debt for as long as ten years can make acquiring additional debt overwhelming. If you’ve incurred more debt than you can manage, contact a Licensed Insolvency Trustee. We will be able to explore all the options available to you, including bankruptcy and consumer proposal filings, which can dissolve student debt after you have been out of post-secondary education for seven years.