How to avoid the student debt trap: A simple guide to navigating rising post-secondary costs
With the rising cost of tuition and soaring rates of student debt in Canada, planning for post-secondary education is more vital than ever.
Getting ahead of the game is wise, says financial expert Brady Jepsen, vice president of retail and commercial banking with Envision Financial, a division of First West Credit Union.
“If you start early, it really does make a difference,” he says.
Start the conversation about money management when your kids are young.
Set them up with a savings account and a debit card. Download a smartphone app so they can see where the money exists for themselves; if they’re younger, get them a classic piggy bank.
When it comes to education, this discussion can be as simple as explaining that school costs money and they might have to pay for some of it as well.
“Having those practical conversations with your child is important,” he says.
Two decades ago, before Jepsen had his own children, he started putting $25 per paycheque into a Registered Education Savings Plan (RESP) for his two nephews. It grew into more than $9,000 over 15 years, an amount they shared when they started school.
“Where else in this day and age can you put in a dollar and someone else gives you 20 cents immediately?” says Jepsen. “RESPs could be, and should be, a key component [to planning your child’s education].” (The 20 per cent matching contribution he mentions is provided by the federal government through the Canada Education Savings Grant (CESG).)
Another thing to discuss with your kids is how best to spend savings during the post-secondary years. “[Ask your children], ‘What kind of job do you think you will have [after school]? Is that going to afford you a lifestyle after the fact?’” says Jepsen. “We’re not trying to put a wet blanket on anyone’s dreams, but be realistic.”
Speak to your child about some of the hidden costs of being a student. Full-time students paid an average of $16,600 for a year of post-secondary school from 2014 to 2015, according to Statistics Canada. But the cost of school isn’t just limited to tuition.
How much will textbooks cost? How much is a bus pass? How are they going to pay for food? How much will other aspects of a student lifestyle cost them?
That’s where budgeting comes into play, whether it’s on paper, in an app, or just in our heads.
Most financial institutions offer tools through online banking for budgeting, but Jepsen says the “old-school” methods of paper and pen or Excel spreadsheet do the job, too.
Here’s how to organize it: List all your expenses in one column and think about how much you would spend on each. When the time comes, note how much was actually spent on each item and then figure out that difference.
Budgeting will help students understand how they spend their money, but parents should also consider setting up their young adult on a small-balance credit card to teach them the ropes of managing and building credit.
“Get them used to putting some of their spends on the card to establish a credit rating and just get used to managing debt,” says Jepsen.
The average Canadian graduate finishes school with more than $26,000 in debt, according to Statistics Canada. It’s important for your child to know which type of debt they have and what costs are associated with it. If your child is dealing with multiple loans, establish which is the costliest.
“If you have credit cards at 19 per cent, a credit union loan at seven per cent and a government loan at three per cent, it would be prudent to tackle the most expensive one first and get rid of it,” says Jepsen.
That could involve going to a credit union and incorporating one debt into another (such as combining MasterCard debt with credit union loan and getting a lower interest rate).
Jepsen also suggests avoiding a common knee-jerk reaction to pay off loans first. If your child is fortunate enough to land a job in their field, it could be smarter to save money then focus on debt repayment.
“We have to get these kids to start saving for things like cars and homes more quickly. Yes, you could start paying off your student loan debt, but let’s start saving for RRSPs.”
Don’t forget to budget for some celebrating, too. “Life is going to come at you very quickly,” says Jepsen, and after spending time in school, a bit of celebration is warranted. Tell your child to grab a backpack and explore; but have them chat with a financial advisor first so they can figure out what’s affordable.
“They’ve just accomplished a heck of a lot. Maybe it’s time to celebrate what they’ve achieved.”
A financial advisor can go a long way in helping you and your child prepare for post-secondary education and everything that comes afterwards. “Life is going to throw you curveballs, either while you’re in school or outside, and too often I see people get behind financially and more often than not, people try and avoid it or solve it on their own,” says Jepsen. Talk to an Envision Financial advisor for more information and click here to learn more.