After high school is when a lot of us begin accumulating debt. We've acquired newfound freedom, and for many, our first credit cards. Next up for many high school grads is college or university, when the accumulation of student loan debt typically starts. Finally, by the time college or university graduation rolls around, many students are tens of thousands of dollars in debt, and for them, the end of post-secondary is simply the start of managing student loan debt repayment.
Why Do So Many Students Find Themselves in Debt?
Why do graduates find themselves with such overwhelming student debt in Canada? For one, tuition fees across all provinces continue to rise. For example, in the 2018-19 academic year, tuition for undergraduate programs for Canadian full-time students averaged $6,838, up 3.3% from the previous academic year; while the average cost for graduate programs was $7,086, a 2.4% increase over 2017-18. Most recent estimates put the average student loan at just over $5,300 per year. Thankfully, Canada is taking steps to improve the situation, but rising tuition isn’t the only cause of student debt. Sometimes, it comes down to poor money management or a lack of budgeting or debt-relief knowledge, leaving graduates wondering how to pay off Canada student loans. In this blog, we offer student loan debt advice for pre- and post-college and university students.
Best Student Loan Debt Advice for Students
For high school graduates considering college or university, and for those who recently started their first year of post-secondary education, it helps to look at the mistakes of previous college and university attendees. Global News Canada reports that more than 75% of Canadian graduates under 40 have regrets about their spending habits during their college and university years:
- 30% would have lived more frugally
- 28% would have worked more during school
- 25% would have avoided credit cards and car loans
With this in mind, here are some of our top tips for new college and university students, otherwise known as Generation Z.
1. Live Frugally
Frugal living doesn’t mean being cheap; rather, it’s about prioritizing your spending so that you have more money for the things you really need right now, or will need in the future (such as money to pay back those student loans). Many students make the mistake of thinking they’ll get out of school and start earning a good salary right away, but that’s often not the case. In fact, many have to take unpaid internships, temporary work, or minimum wage employment just to get by until the right job comes along. This makes saving money very important because you don’t want your student loan payments to go into default and ruin your credit once you do graduate.
Living frugally might mean passing on a night out at the bar; skipping the daily trip to Starbucks and instead choosing dorm coffee or home brew; or limiting unnecessary expensive purchases (clothes, cell phone upgrades, etc.). We understand it can be difficult to give some of this up when you’ve got your first taste of freedom, but take it from us and the graduates that came before you—it’s worth it in the long-run.
2. Do Part-Time Work
Many university and college students see student loans as a means of avoiding work; however, when possible, it’s always best to earn some extra income, so you can rely less on your loan funds for everyday expenses. Now, we’re not saying you should work so much that it negatively impacts your grades; after all, education is your priority. But picking up a manageable part-time job or even a side gig can go a long way towards paying off debt in the future. Just be sure to save this money and resist the temptation of using the funds for reading week vacation or a spending spree. We've put together a list of ways to earn extra cash which might be an option for you. (Have other ideas? Share them in the comments at the end of this blog.)
3. Avoid Credit Cards and Car Loans
This is a big one. We know it’s hard, especially with credit card companies throwing themselves (and their free swag) at you during orientation week and other campus events. Car loans are also pricey. (If you're a student living on campus, walking, biking, or ride-sharing is your best bet.) You may be thinking, what’s the difference between these loans and a student loan?
Student loans are considered "good debt" by credit reporting agencies, because the expectation is that down the road, you’ll be able to earn more money because you’ve received an education. They also have lower interest rates. Credit cards and car loans on the other hand are considered bad debt, because they have higher interest rates and aren’t generally used to purchase anything that will appreciate in value (automobiles lose a great deal of their value the moment you drive them off the lot). If you’re a student, we recommend avoiding car loans entirely if possible, and if you use a credit card, be sure to pay off the balance each month in full, so you’re not paying high interest fees. You can even consider getting a secured credit card, which can help you build your credit. You can read more about how secured credit cards work (and work to keep you out of financial trouble) in our blog How To Live Without Credit Cards.
Best Student Loan Debt Advice for College Graduates
While it’s easier to get ahead of the curve before your final years of post-secondary, and you should continue to try to live frugally and pick up side gigs whenever and wherever you can, there are still ways to find student loan debt relief even after graduation. You might want to consider any of the following options. And remember, there is a six-month grace period for student loan debt repayment with the hope that you’ll find employment during this time, so you’ll then be able to make your student loan debt payments thereafter.
1. Student Loan Repayment Assistance
If your grace period has expired and you can't afford to make your student loan debt payments, or if you've begun the repayment process but are still finding it difficult to keep up with your payments, you can apply for a Repayment Assistance Plan (RAP). RAPs may be able to reduce your loan payments or stop them entirely depending on your financial situation. You can learn more about them, your eligibility, and how to apply on the Government of Canada website. It’s important to note that there are other circumstances under which your student load debt payments can be reduced, or your student loan debt is forgiven entirely, which you can learn more about here.
2. Repayment Extensions
While you may want to pay off your student loan as quickly as possible so that it's no longer hanging over your head, it's not always possible. Fortunately, you may be able to extend the repayment term. This of course is counter productive to paying off your student loans fast, but it does offer some relief by giving you some breathing room, financially. By extending the terms of your loan, you’ll pay less per month, but you'll pay more over a longer period of time due to the accumulated interest. However, it’s a good option in the short-term if you’re struggling to keep up with payments. Then, once you’ve secured a good job, you can begin to pay more to shorten the time period and reduce the interest, or simply pay off the student loan in full. Read more about Revision of Terms here.
3. Tax Credits
Unless you’re working with a professional accountant, many students might not know that you can claim the interest you paid on student loans received under the Canada Student Loans Act, the Canada Student Financial Assistance Act, as well as other provincial programs. However, before you get too excited, note that this would be considered a non-refundable tax credit that can only be used to reduce the amount of taxes you owe; it cannot be used to receive a tax refund. But the good news is that, in case you don't owe any taxes one year, you can carry the non-refundable tax credit forward for up to five years.
4. Repayment Planning
When you begin paying back your student loan, it’s important to understand your repayment plan. There are a number of things you should be aware of:
- Payments are first applied to the monthly interest you have accrued; the remainder of your payment then goes to the principal balance. If you’re able to pay even a bit more, or come into some money and make an extra payment, this will go towards just the principal, which lowers it faster and reduces the amount of interest moving forward.
- Be sure to check the interest rates on all of your loans and debts. While you’ll need to make payments on all of them, you may want to pay more towards the one with the highest interest rate first (also known as the avalanche method). However, some people prefer to pay more towards the loan with the smallest balance to get it off their back faster (the snowball method). You can learn more about these two methods of debt repayment here.
Finally, although it may be tempting if you have multiple student loans, you should try to avoid debt consolidation loans. With a debt consolidation loan, you’ll likely be charged a higher interest rate and lose the aforementioned non-refundable tax credit. And while you may be able to extend the amount of time you have to pay back a debt consolidation loan versus the student loan, you’ll pay more in interest over time. Want to learn more? Check out our blog Should I Consolidate My Student Loan Debt.
Want To Speak With a Credit Counsellor?
Starting college or university, or graduating from university or college is a very exciting time—but it can also be a very scary or confusing time if you’re struggling with debt. Unfortunately, managing your debt and managing student loans isn’t usually taught in high school, college or university for that matter. But at Credit Canada, we’re here for you. Our certified Credit Counsellors have years of experience helping people just like you, offering financial advice to get them on the path to financial freedom through better money management and budgeting. We are a non-profit organization that helps Canadians get out of debt. If you need student debt counselling or are a graduate in need of some personal debt advice, give us a call at 1.800.267.2272 or contact us online. Not ready to chat just yet? We get it! Try downloading our free online Budget Planner first—it may help you decide how best to pay back student loans on your own.