The student debt spiral and expert advice on how to cope

Investing in your education is a good idea, but it doesn't always seem that way when you graduate tens of thousands of dollars in debt. Here's how to cope. The Canadian Press

Maggie Sproule is 25 years old and is about $35,000 in debt.

Most of this is a student line of credit that she took out in order to pay for her makeup artistry diploma program in Toronto. Her tuition and equipment fees are over $20,000 for an eight-month course.

Not only that, she needs to pay her living expenses in downtown Toronto: $800 for the room she rents in a one-bedroom-plus-den apartment she shares with a childhood friend (Sproule sleeps in the den), as well as feed herself and get around town. She’s about halfway done her course.

The demanding schedule doesn’t leave her with enough time to get a part-time job, so Sproule is living almost entirely off that line of credit.

READ MORE: No RESP? How to manage (and avoid) student debt

Sproule says she knows the school is expensive, but that it’s a highly-respected program which will help her get a job that she loves. Unfortunately, that job is low-paying, at least at first.

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“In order to really be taken seriously in this industry, you have to have a good education and be taught everything, so you have to go to a school like this, but then you’re starting out – the average salary in your first year is way below what your student loan is for.”

She estimates that she should be able to pay off her debt in about five years, by taking on bridal makeup jobs and working part-time as a server. “And that’s even, I think, being optimistic,” she says. She does worry about how she’s going to set up her own makeup artistry business while trying to pay off her debts and manage rent and other necessary expenses.

READ MORE: 5 steps to a financial plan

Still, she thinks that the investment is worthwhile. Before going to makeup artistry school, she worked in marketing, but she didn’t enjoy it and she found the pay too low. “I figured if I was going to be making that amount, I should be doing something that I loved.”

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Graduated, now what?

Krista Reierson graduated from a four-year college diploma in social work less than a year ago. Since then, she has found a job working with homeless shelters in Victoria – for which she gets paid less than $20 an hour.

At that income, she says, she’s having trouble making a dent in her $40,000 government student loan.

Her minimum monthly payments are $200, which she pays on top of her $825 rent in Victoria, her hydro, cable and Internet bills and groceries. She says she’s only able to pay off the interest every month, which means that she doesn’t get ahead.

“It’s totally frustrating: They don’t mind just handing you the money but they also don’t take [your eventual earnings] into consideration,” says Reierson.
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She thinks that if student loan repayment was based on net income instead of gross, it would be a more realistic way to assess how much she could pay.

Her spending hasn’t been perfect – she has occasionally taken vacations, for example, and had to take out a payday loan to make ends meet over the holidays. She was never taught how to budget, she says, and she’s not great at it. Still, she finds that the amount she is expected to repay is out of step with what she can afford.

“I am going to be paying this off for the rest of my life to be a social worker.”

Having the debt gone would be a great weight off her shoulders, she says.

“If that could magically disappear, if the government could magically lose that information, that would be great. But I don’t have that kind of luck.”

How to minimize your debt

The biggest problem with student debt is that people are taking on more than they need to, says Shelley Clayton, director of financial aid for the University of New Brunswick and a member of the National Steering Committee on Financial Literacy.

“I can’t tell you how many people I talk to and I encourage them to apply to programs and they self-select themselves out,” she says. “They say, ‘I’m never going to get it so I’m not going to apply.’ And that’s my bigger issue. You’re taking unnecessary debt.”

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There is a huge variety of funding sources out there that students and their parents aren’t accessing, instead preferring the ease of a bank line of credit, she says. There are loans at the federal and provincial level. There are grants, bursaries and scholarships. The university or college’s financial aid office can help point students to programs and walk them through a loan application, something Clayton says takes as little as 20 minutes.

“Bar none, there is no more positive option out there than a government student loan. It’s interest-free while you’re in school. While you’re in school, there is no interest accumulating. I keep telling them, tell me a line of credit where that exists. And if you can’t, give me 20 minutes of your time.”

Clayton acknowledges, though, that many students take out lines of credit because loan money isn’t sufficient. And still others rely on credit cards and even payday loans to get them through a financial emergency, which can leave them with a lot of extra debt and interest charges. Students don’t tend to have an emergency fund set aside, so if a problem comes up, they will have trouble dealing with it.

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READ MORE: Chequed out — Inside the payday loan cycle

While in school though, students can minimize what they spend. Clayton suggests that as loans come in, students prepay set expenses such as their rent, so that even if they come up short by the end of the semester, at least they have a place to live. Also, if there is any money left over from their loan one year, because they received an unexpected scholarship, for example, Clayton recommends that the student immediately pay that money back.

“Just because you get loan money doesn’t mean you have to spend loan money.”

And of course, problems don’t end with graduation. Students spend years repaying their debts. There are some options though, says Clayton. First of all, some provinces will reimburse some money if a degree is completed on time. For example, if a student graduates with more than $26,000 in debt, the New Brunswick government will pay for everything over that $26,000 mark, provided the degree was completed in the minimum number of years – like four years for a four year degree, she says.

And if graduates are struggling to pay back their student loan debts, they can apply for a repayment assistance plan, which can reduce the monthly amount they have to pay.

Other than that, Clayton recommends paying off student loans like some people pay a mortgage: “If you have a certain amount of money extra in a month, put it on there. If you get your income tax return and you’ve already made your payment that month through RAP (repayment assistance plan), that can go directly to the principal.”

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And is school too expensive? “I understand the high cost of post-secondary education and I understand it is a cost. But I don’t think it has to be as high cost in some programs,” says Clayton.

“If there are those high costs, then boy they should help you get employment at the other side.”

Note: This feature is included for expository and informational purposes; it is not meant to be taken as personalized or expert financial advice.

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