Repaying student loans has always been a challenge, but in a time when housing and meals are taking up more of your income than ever before, making smart choices about your loans and repayment is just as critical.
That’s according to financial experts, who are urging young Canadians to curb their college and university debt and trying to dispel misconceptions about it.
“The cost of rent and food has skyrocketed,” said Joey Kindarji, associate portfolio manager at Wealthsimple.
Even if the debt were the same as in the past, it is actually more difficult to repay today.
Joey Kindarji, Associate Portfolio Manager at Wealthsimple
As the cost of living rises, students have a range of options to ease their debt, from being selective with lenders to budgeting.
A first step is to set a target ceiling for total debt over the course of your studies, with the amount not to exceed your expected annual salary after graduation.
According to Statistics Canada, the average recent bachelor’s degree graduate had about $30,600 in student debt in 2020. This is higher than in 2010, when it was $26,300, but due to inflation, its real value is 16% less.
“If you’re a doctor and you want to make a lot of money, you can take on a little more debt, knowing that you’re more likely to pay it back,” Kindarji said.
To keep interest costs low, borrowers should look to the federal and provincial governments as a reference source, opting for bank loans only if necessary. Interest paid on government loans is considered a tax credit, and the state also offers more generous support options.
“A traditional bank has interest and they charge it up front,” said Joshua Harris, a licensed insolvency trustee at Harris & Partners. “They’re not your friends.”
Look for “free money”
Harris recommends that students apply for as many grants and scholarships as possible, as many applicants end up with more money than expected.
“Debt is debt, and you will have to pay it back” – regardless of interest rates – he said. “So take advantage of this opportunity to pay less.”
While some experts say there’s no harm in paying off some debt while you’re in school — as long as it doesn’t compromise your educational priorities — others advocate borrowing as much as possible from the government at 0% interest, then putting a small portion of it into safe investments like high-yield savings accounts or guaranteed investment certificates.
“You can earn a little bit of yield and then have the money to pay it back [la dette] – a kind of free money to invest,” Mr. Kindarji said.
Those who choose this path should keep in mind that interest rates on these loans typically begin to rise six months after graduation, he added.
Other debt-reducing tips include opening a hybrid checking-savings bank account with higher yields — up to 5% — and taking a gap year or semester to work and save.
To limit their debt, high school students can even look for college and university credits available through Advanced Placement courses. This can result in tuition savings if fewer courses are required in the future.
Refund
The first step to repaying a loan begins with developing a monthly budget.
“You really have to think about the costs of your lifestyle and the sacrifices you have to make,” Kindarji said.
“That might mean being a little more frugal with your money, living with someone else or staying home with your parents.” […] Think about a budget and then try to tackle the debt as quickly as possible.”
This arithmetic includes calculations around interest payments, which can add up quickly. “If I pay $100 a month for five years, I’ll pay $6,000 [en intérêts] ” explained Joshua Harris.
For those struggling to make these payments, the provincial and federal governments’ low-income plans provide a more flexible approach.
Applicants to the federal Repayment Assistance Plan may be eligible for reduced payments or no payments at all, depending on their income. If an application is approved, the government will, among other measures, pay all interest owed on the portion of the student loan that a reduced payment cannot cover.
“You have to take advantage of them when you need them,” Harris said of repayment plans.
What to avoid
Don’t take out loans to pay off your student debt. “It doesn’t make sense,” Harris said.
“The thing to know is that there are government programs that allow you to pay off your student loans,” he said, with banks being less lenient.
Experts also advise against refinancing if possible. But if you’re juggling a bunch of loans, including private loans, it may be a smart option.
“Refinancing or debt consolidation is typically recommended when there are a large number of debt products to manage or if the monthly repayment amount puts pressure on budgeting for other living expenses,” said Jennifer Bishop, vice-president at Toronto-Dominion Bank.
Finally, don’t pay a debt consultant for advice, says Harris, who doesn’t charge for consultations.
“Nothing initially,” he said. “You can call a trustee’s office anonymously and they will give you that answer.”
” Do not be shy. ”