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Student loans: Lessons in debt.

by:
Laurie Campbell

There is the horror story about the 20-something fellow who, after receiving his post graduate degree in psychology, could only find a job as a clerk at a convenience store paying him little more than $1,000 a month. He has a wife and two small children, and the family’s household debt amounts to $80,000, most of it resulting from student loans the man took out to get his degree.

Now, that’s scary.

Granted, most college and university students don’t face circumstances quite this dire upon graduation, but as they say, it can happen to anyone.

The lesson here is clear - in matters of financing an education, wise saving, borrowing, and spending are essential. There are no guarantees graduates will come out of university with jobs in chosen fields of study at a good pay scale. And, in any event, even students who land choice positions can look ahead to paying off their student loans over many years. In fact, according to Canada Student Loans, the time taken for repayment of student loans averages almost a decade.

It just goes to show that post-secondary students and their parents ought to take financial literacy to heart in relation to student loans. Taking pains to do so today can mean avoiding financial pain tomorrow.

Right now, more than a million and a half students are traipsing the hallways of universities and colleges across Canada. I wonder how many of them started school this year with a financial plan of action for the long term – or even for the short term? About 60 per cent of these students expect to graduate with no debt or less than $10,000 in debt, according to a survey conducted by the Bank of Montreal last spring. But realistically, what are students doing to meet these expectations?

Consider that the average cost this year of tuition for an undergraduate degree in Canada is more than $5,000. Add to that all the necessities of student life, such as food and shelter, clothes, books, supplies, transportation and incidentals. The sum of all parts is not small. Granted, a number of students have mom and dad to fall back on for financial support. But even then the family financial well for most students is not deep.

I can say with some authority that student expectations to be debt free in no time after graduation will not come close to being met if money is being frittered away on designer clothes, partying, or splurging on entertainment and travel. Moreover, for students with credit cards who are fiscally undisciplined, financial storm clouds already could be gathering on the horizon.

Indeed, sign-ups for first-time credit cards are probably already over after the usual back-to-school push by financial services on campuses across the country. A lot of university frosh are feeling pretty good about that shiny new piece of plastic in their wallets. My advice is, curb your enthusiasm kids – that isn’t free scratch. Piling credit card debt upon student loan debt is just plain dumb.

Approaching the problem of student debt on a piecemeal basis also is less than wise. Being smart about money as a student is not just a matter of being responsible with a credit card, it’s a matter of looking at the big financial picture, which above all includes a budget – and by that I mean a realistic spending plan encompassing savings and resources - that is put in writing and followed to the letter every day, week, month, and year until you graduate.

At the very least, students should keep money from all sources - be they summer work earnings, grants, bursaries, scholarships or family donations - in a savings account. An automatic system should be set up whereby money is transferred from savings to chequing to free up only the money that’s needed for each week’s essentials. It’s the best way to avoid the temptation of spending beyond one’s means. At the same time, think about the savings account as being otherwise untouchable.

Meanwhile, a credit card only should be put to use under special circumstances, and credit spending should not exceed a planned amount that can be paid back on time without difficulty. Just look at it this way: who wants to start out in a career with a bad credit rating? (Believe me from my experience at Credit Canada in helping debt-ridden souls, more than a few graduates do start out this way).

For college or university students who have not yet followed the steps I’ve outlined here, my advice is to do so now. You’ll thank me later.

Think long-term, too. Students should educate themselves about what can be done over time to help ease pay back on student loans. Take the advice of Kerry Taylor, who as a student saved thousands of dollars through a savvy approach to taxes. She tells all about it in her book 397 Ways to Save Money. Among other things, she writes about how educational tax credits and receipts can be used against future income.

Students and parents of students alike may be surprised to find out that a number of tax deductions pertain to everything from public transportation and student loan interest, to tuition and textbooks.

In summary, those who take out student loans should remember two things. Hit the financial books, too. And use your brain.

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