By Jeané Herman, LIT, CIRP
Whether you’re a new graduate or a first-year post-secondary student, student financing for some or all of your costs of living and tuition is likely on your mind.
It may seem too soon to worry about how you’ll repay student loans, but budgeting for ongoing living expenses and for future debt repayment is just as important when you’re a student, as when you’re a graduate.
Let’s look at how student debt repayment works:
After completion of your final school term you have six months before you must start making payments on student loans. However, interest starts accruing right away.
According to Statistics Canada, based on 2010 numbers, the average Canadian university graduate finishes school with more than $26,000 in student debt.
Using the Government of Canada’s loan repayment estimator, using a fixed interest rate of 3.95 per cent (you can choose fixed or floating), it would take 10 years to pay off this debt, paying $328.65 per month. The total interest paid over the life of the loan is $13,438.46. If you don’t wait for the six-month non-repayment period, you could pay it off in 9.5 years.
Budgeting for student life and future debt repayment:
Many students fund their living expenses, in addition to their tuition, with credit. Some will use federal or provincial government student loan, and some a student line of credit or credit card.
Ask yourself these questions:
Question 1. How long do the loan proceeds have to last to cover expenses?
Question 2. Will you get new funding every semester, or are you using a limited amount of credit accessed through a credit line or credit card?
Using the total loan divided by the number of months it must cover gives you a monthly amount to work with.
Question 3. When does repayment start?
Question 4. Will the credit be used solely for tuition or do you require the credit to cover living costs as well?
Question 5. What are your monthly expenses? Be honest – do you need that daily latte and weekend case of beer or will you eat Kraft Dinner and drink instant coffee? If you’re using credit to cover your living costs, you have to repay this, plus interest at some point. Do you want to pay interest on lattes and beer?
Question 6. Does your budget balance? If not, cut back on expenses.
Question 7. What is realistically left over to pay the debts?
Question 8. With no change in circumstances, how long will it take to pay off the debts?
Repaying your debts
Once you have your living expenses budget, it’s time to look at monthly payment obligations. Most debts include interest, and student loans are no different. Visit the Government Canada website for more information about Repaying a student loan – How to start. Depending on income, you may also qualify for student loan repayment assistance.
While there’s no set time to pay back credit card debt, as there is for loans, paying off credit cards avoids wasting money on interest.
What if you can’t afford the payments on the debt?
After reviewing your budget, you may find the money left over won’t cover minimum monthly payments, never mind pay off the debts. Now what?
Can you take on a part-time or second job? Can you defer payments through the repayment assistance plan discussed above? If not, it’s time to seek the help of a licensed, reputable professional.
Licensed Insolvency Trustees (LIT) are the only professionals licensed and monitored by the federal government to carry out bankruptcy and proposals. LITs can stop ongoing and pending legal and collection action for debt.
You’re not alone – LITs walk you through the steps of a bankruptcy or consumer proposal to see if it’s the right solution for you.
Will the student loan debt be included? Student loan debt won’t be extinguished after a bankruptcy or a consumer proposal is completed if it’s less than seven years from your last study date. In some hardship cases, that may be reduced to five years.
If you have not yet completed your studies, interest will generally not begin accumulating, and repayment may not be required until six months following completion of studies.
Based out of Kelowna, Jeané Herman, is a Licensed Insolvency Trustee and Vice President at MNP Ltd. Contact Jeané toll-free at 310-DEBT or 877-898-2580 for a free, no obligation, confidential consultation to find a Life-Changing Debt Solution that fits your unique situation.