How to combat the far-reaching consequences of student debt
Many Canadian students who have graduated this year with degrees and diplomas also will leave school with thousands of dollars of debt that may take them years to repay, impacting their adult years and those of their parents.
Higher education is a costly pursuit in Canada that likely will get more expensive in the future. The total cost for an undergraduate university degree currently can exceed $80,000 and is expected to be more than $140,000 by the time a child born now is old enough to enroll.
According to recent statistics students who require a Canada student loan now graduate with an average debt of $28,000. With a youth unemployment rate of 13.4 per cent, many are having trouble finding jobs and either have to move back home with their parents or take on more debt to survive after graduation.
The result of these factors is that many students are sinking further into debt upon graduation and may even have to delay major life events such as buying a home, getting married and starting a family due to their high levels of debt.
The impact of high student debt also can affect decisions and the lifestyle of their parents. A study by BMO Wealth Management has found that many parents are postponing their retirement to help support their adult children financially.
One third of parents with children aged 18 to 34 would save less for retirement than they planned to support their children while 41 per cent are concerned their adult children have or will have financial problems caused by debt. Parents are willing to retire later than expected, save less for their retirement, have a less comfortable retirement, take on some of their children’s debt and even withdraw money from their retirement savings to help out their indebted offspring.
“Many students are going to school to get a good education but they are coming out with debt and often are struggling to find jobs and make money to support themselves,” says Doug Jones, a licensed insolvency trustee with BDO Canada.
“A lot of them are being forced to move back in with their parents. We’re seeing this situation all the time today.”
Part of the solution to the growing problem of student debt is good, pre-education financial planning. This could involve knowing how much your child’s chosen education will cost, working and saving for it beforehand and understanding the job prospects are after graduation. “We would encourage people to focus on budgeting sooner rather than later,” says Jones. Budgeting is key.”
Parents and students alike also should investigate and take advantage of available government programs.
Registered Education Savings Plans (RESPs) allow parents, guardians, grandparents, other relatives and friends to put up to $50,000 in a plan for each child who is enrolled in qualified educational programs. There is no annual contribution limit and the government will add a grant of up to a maximum of $7,200.
Income and capital gains can be generated within an RESP through investment in a variety of options such as stocks, bonds, mutual funds, guaranteed investment certificates and grow tax free until the children named in the plan are ready to pay for their post-secondary education. They only pay income tax on the gains earned by the plan and the grants as they are withdrawn, which usually is low because the income of most post-secondary students is very limited.
The federal government also offers a student loan repayment assistance program which may help students manage their loans by reducing their monthly payments. It operates a national student loans service centre where students can go for information and help with their loans.
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As well, the Financial Consumer Agency of Canada has a lot of great advice and financial information for students and consumers in general.
“If you access these resources and options and still are having trouble managing your debt then you may want to seek professional financial advice and help,” says Jones.
“The sooner people plan for and manage education costs and borrowing the better.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
© 2016 2016 Talbot Boggs