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Education doesn’t come cheap. How to keep your debt in check

Being smart about student debt

Education doesn’t come cheap. A lot of students just assume they’ll go into debt to pay the bills. But is that a smart move? After all, no one likes debt. And student debt can hang painfully over your head for years after you graduate.

The good news is that borrowing for your studies after high school isn’t like borrowing to buy a car or a big-screen TV. Those things will eventually wear out and need to be replaced. But your education has lasting, long-term benefits – especially for your wallet.

Studies show that university graduates tend to make somewhere around $20,000 a year more than non-graduates. Over your whole career, that can add up to about $1 million of extra income.

So if you’re ready to make the investment, but need some help paying your way, read on. You’ll find lots of useful information, tips and examples about how to manage your student loans wisely. And, you’ll discover how it really pays off to get smart about student debt.

Learn more

Top three dangers of student debt

Why borrow from the government?

What’s it going to cost? The lowdown on your Canada Student Loan (CSL)

The slippery slope: how student debt adds up

Making borrowing make sense: one student’s story

Quick links: Where to get funding

Content provided by InvestorED.ca, an independent non-profit created by the Ontario Securities Commission to help people make effective use of financial information.

Student debt smarts

KC just got his university acceptance in the mail. He’s not sure how he’s going to pay for it, but he’s going! He considers three possible plans to pay for his four-year program:

Scenario one: Live on campus, borrow to pay tuition

KC figures he can make about $10,000 each year if he gets a good summer job or works part-time through the school year. That will be enough to cover most of his living costs away from home. But he worries he may still need a Canada Student Loan (CSL) to pay his tuition.

KC estimates he would need to borrow $18,000 over the four years. He plans to pay the loan back over the usual 10-year period – starting six months after he graduates. With prime at 4.5%, here is what his student loan could cost*:

* Results based on the student loan repayment calculator provided by the National Student Loans Service. Assumes interest rates don’t change over 10 years.

KC’s cost of borrowing: with prime at 4.5%, he could pay $19,324 or more in interest. Of course, if he chooses a floating interest rate and prime rises, he could pay a lot more interest over 10 years. On the other hand, if prime falls, he could pay less.

Scenario three: Live at home, borrow to pay tuition and buy a car

KC wonders if he would save any money by living at home instead. He would have to buy a car to get to class. But most of his living costs would be lower.

KC does some math and figures that each year his tuition and living costs would be about $8,500 a year, plus the cost of a car loan, gas, parking and maintenance. KC plans to pay the car loan back over the usual four years. With loan interest at 5%, here is what it would cost to buy a $10,000 car**:

** Results based on car loan calculator provided by Canadian Driver. Assumes interest rates don’t change over 4 years.

With this plan, KC estimates his total costs – including his car – would drop from $14,500 to about $11,500 a year. So even if he were able to work and make $10,000 a year, he would still need to borrow about $6,000 through CSL to cover the gap.

He plans to pay the loan back over the usual 10-year period. With prime at 4.5%, here is what KC’s student loan could cost*:

* Results based on the student loan repayment calculator provided by the National Student Loans Service. Assumes interest rates don’t change over 10 years.

The cost of KC’s debt: even with two loans – his student loan and a car loan – he could pay as little as $3,500 in total interest over 10 years, based on today’s rates. And since his student loan will be quite small when he graduates, he may be able to pay it back faster and pay even less interest. Of course, if he chooses a floating interest rate and prime rises, he could pay a lot more interest over 10 years. On the other hand, if prime falls, he could pay less.

Conclusion: KC figures he will likely borrow less and pay less interest if he lives at home and buys a car. Still, the difference in cost between scenario one and three could be as small as $3,000.

So the real question for KC is this: would he rather have a car and save a little money, or live away from home and owe a little more when he graduates? For many students, there’s a real value in the experience of living on their own. For KC, it may make sense to borrow as long as he can keep his student debt low.

NEXT: Quick links: Where to get funding

Content provided by InvestorED.ca, an independent non-profit created by the Ontario Securities Commission to help people make effective use of financial information.

Student debt smarts

Let’s say you borrow $30,000 through the Canada Student Loans (CSL) program for your university studies. You plan to pay the loan back over the usual 10-year period. With prime at 4.5%, here is what you would have to pay*:

* Results based on the student loan repayment calculator provided by the National Student Loans Service. Assumes interest rates don’t change over 10 years.

Notice you’ll pay close to half of what you originally borrow again in interest. Of course, if you pay the loan back faster, you can save a pile of interest.

Now let’s say you paid the same $30,000 loan back in 5 years instead of 10. With prime at 4.5%, here’s what you would pay instead*:

* Results based on the student loan repayment calculator provided by the National Student Loans Service. Assumes interest rates don’t change over 5 years.

Cutting the payback time in half cuts the interest you pay more than 50 percent as well. In this example, you’d save anywhere from about $6,000 to $10,000 in interest. But you’d have to pay a lot more each month – about $300 more – to get those savings. That’s not easy money for a lot of new graduates.

Remember: how fast you pay off your student loans will depend on a number of factors, such as your income after you start to work.

NEXT: The Slippery Slope: How student debt adds up

Content provided by InvestorED.ca, an independent non-profit created by the Ontario Securities Commission to help people make effective use of financial information.

Student debt smarts

1. Your debt can really add up – and be hard to repay. Paying student loans back can be difficult when you are just starting your career. And, because Canada Student Loans (CSL) sets up its loans so you pay back the interest first, many people with low incomes pay thousands of dollars in interest without paying off any of their principal. For an example, read: What’s it going to cost?

Tip: To cut down on your interest costs, pay your student loans off as fast as you can. Let’s say that you’re supposed to pay $300/month but you are able to make payments of $450/month instead for a few months. That extra $150/month is used to pay down your loan principal, which reduces the loan amount and therefore the total interest charged on your loan.

2. You can have even BIGGER problems if you fail to pay back your loan. It can badly damage your credit rating, so you may have trouble borrowing money next time you need it – say for that first car or home. It can also make it hard to get a job, rent an apartment and get on with your life.

In some cases, you may even have your pay garnisheed – which means the bank will take what you owe first, off the top of your pay. And you know what that can mean: living with your parents because you can’t afford a place of your own.

And if you think that’s frustrating, just wait till you start getting those frequent calls from collection agencies. Collection agencies make money when they collect bad debts, so they don’t give up easily.

What if you just flat out can’t pay it back? There’s a rumour going around that declaring bankruptcy will get you off the hook. But if you’re thinking this is a good plan, think again. Bankruptcy leaves a big black mark on your credit record . . . and it won’t wipe out your student debt until seven years have passed since you were a student.

In other words, the government expects you to make a serious, sustained effort to repay your student loans. Learn more.

3. It can lead to even more (unwise) borrowing. For some students, an education loan is just the first step on a slippery slope. They figure, since they’re going to take on a lot of debt to pay for their studies, what’s another loan for a car? Or why not use that credit card to buy some new clothes, a TV or a vacation? They’re in debt anyway . . .

These students seem to forget the extra cost of buying anything on credit. And, they overlook how long it could take to pay off that debt and have money for other important things – like buying a car, a home, or getting married. Many people are still paying off student loans well into their 20s and even 30s – again, often from the comfort of their parents’ home, because they have too much debt to afford a place of their own.

The truth is, debt adds up fast. Read Natasha’s story in The slippery slope and you’ll see why.

Remember: students loans are just one way to finance your education. There are other options, including co-op work/study programs, grants, and scholarships. Not to mention help from parents or family. Check out all your options before you borrow. To learn more, read: Where to get funding.

Next: Why borrow from the government?

Content provided by InvestorED.ca, an independent non-profit created by the Ontario Securities Commission to help people make effective use of financial information.

I know I’m supposed to pay my credit card bills, but I’m wondering: what happens if I don’t?

Although you might think that it is an easy oversight to miss a credit card payment, the repercussions will be with you for years. Credit cards can hold nasty surprises including interest rate hikes and worse if you miss a payment, so you need to put together whatever resources you can to pay your monthly bill- even if you can only make the minimum payment.

It goes without saying that paying the minimum payment is an option in only one situation- that is if the alternative is not paying anything. In either case, if you find that one of these options is necessary than you need to need to think seriously about whether you can afford your lifestyle.

There are four stages of woe if you default on your credit card bills:

1. Your card issuer will inform the credit bureaus and your rating will be reduced, making it much harder and/or more expensive to get credit in the future. This default will be on your credit record for the next 6 years.

2. Many credit card companies have terms that change if you miss a payment- eg. your reasonable introductory rate of 7% could go up to 18% or more.

3. Your card will be put on hold and won’t be able to use it until it is paid off

4. If you have a savings or chequing account at the bank that issued your card, in some cases the card agreement may allow them to take money from your accounts to cover the outstanding credit card bill.

5. If you don’t pay for a long enough period, the bad account will be turned over to a collections agency. At this point, your credit rating will be exceptionally low and you will have long-term repercussions-

The hassle of any of these issues will live with you for years and will have an impact if you need a loan for things like student debt, a car, a wedding, a house or anything else down the road. The consequences are serious- don’t wait to pay it off, and pay it all off every time.

Content provided by InvestorED.ca, an independent non-profit created by the Ontario Securities Commission to help people make effective use of financial information.