Thousands of graduate students have been walking in front of their classmates and families over the past few weeks to grab their hard-earned diplomas and university degrees. But what used to be a time for cheering, tossing caps and snapping pictures has become a time for fretting, too.
For many, the end of school will be the beginning of the reckoning with student loans. The most recent data available from Statistics Canada show newly minted bachelor grads were carrying an average of more than $26,000 in student debt in 2010 — a load that has likely increased since then. Just like their peers from 10 years ago, the class of 2018-2019 is probably wondering how long it will take to clear the red ink from their personal balance sheet.
The numbers show that only between three and four out 10 will accomplish the feat within three years of finishing their studies.
Bridget Casey knows that feeling. A few months after the Edmonton-native left school in 2011 with $21,000 in debt, reality set in, she said.
But Casey, who runs the personal finance blog Money After Graduation, went on to erase her debt in a mere 22 months. She credits her penny-pinching stamina, a well-paying job and a number of side gigs for that — but also a clear understanding of how her student loans worked and how to tackle her debt.
“I encounter a number of myths and misunderstandings about student loans and the repayment process from students that are just finishing up their degree, or in the process of borrowing more money to continue their studies,” Casey wrote in a blog post.
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So here are some pointers for recent grads:
Interest may accrue during your grace period
Most students are aware of a six-month grace period after the end of the academic year, Casey said. But what few realize is while they don’t have to make payments during this time, interest will start to accumulate on all or part of their loans, she added.
That’s the case for federal students loans. For provincial loans, the rules vary from jurisdiction to jurisdiction. Alberta doesn’t charge interest during the grace period. In Ontario, students graduating or leaving full-time studies before Sept. 1 of this year won’t be charged interest during the six months. Those graduating or leaving school after that date will.
It’s important to start paying what you can toward your student loans right after the end of your studies to minimize the overall amount of interest that will be piling onto your debt, Casey said.
Tax breaks can turbocharge your debt repayments
Recent graduates can take advantage of a number of tax breaks that can help them boost their debt repayments, Casey added. For example, you can claim the interest on government student loans as a non-refundable tax credit, which decreases the amount of tax you owe. If you’re not making enough money to owe tax, you can carry the credit forward until you do for up to a maximum of five years. Recent graduates may also be able to take advantage of the tuition tax credit, which works in a similar way.
Casey said she used both credits to lower to offset her taxes in the first couple of years after finishing her BA.
“I would get a $5,000 tax refund and put that toward my student debt,” she said.
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Beware of debt consolidation
Another issue many graduates aren’t aware of is that consolidating government loans into a line of credit isn’t necessarily a good idea, said Nicholas Hui, a Toronto-area financial planner who focuses on helping young professionals.
Student lines of credit come with interest rates that, on paper, look lower than what the government is charging, Hui said. For example, floating rates on Canada student loans are currently at 6.45 per cent, or prime plus 2.5 per cent. (The prime rate is the benchmark rate Canada’s major banks use to set interest rates on variable loans and lines of credit. It currently sits at 3.95 per cent, according to the Bank of Canada.)
Some financial institutions, by comparison, are offering students lines of credit at prime minus 0.25 per cent, Hui said. But by transferring the debt balance of government student loans into a line of credit or other private loan, students lose the ability to claim interest charges as a tax credit, which may greatly reduce or eliminate the interest-rate advantage of debt consolidation, he added.
Lines of credit also allow students to make interest-only payments for a period of time — often 24 months, Hui said. And, as will all credit lines, you can borrow only what you need.
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On the other hand, government loans are payment and interest-free during school and at least payment-free during the grace period, Hui noted.
Switching to private credit also means giving up on debt repayment assistance, Hui warned. While credit lines have minimum monthly payments — like credit cards — instead of a set repayment schedule, you won’t be able to reduce the amount you owe if you run into financial difficulties. By contrast, through Canada’s Repayment Assistance Plan you can apply to have Ottawa or your provincial government pitch in toward your government student loan balance. Since November 2016, graduates do not have to repay their Canada student loans if they’re making less than $25,000 a year.
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You need a plan
Another thing Hui wants you to know: you’re going to need a plan to attack your debt.
The first step, according to Hui, is to map out your liabilities: how much do you owe on which accounts and at what interest? Though that may sound obvious, it’s not uncommon for people juggling multiple debts to forget about a small loans, especially if they have a balance of less than $5,000, Hui said.
The second step is to assess your financial situation: how much money, if any, are you bringing in? How secure are your sources of income? And what are your short- and long-term goals? All of that will affect how you should repay your debt, Hui said.
Casey, for example, noted that while most students opt for a fixed-rate interest on their government loans, it may make sense to opt for a lower variable rate if you know you’re going to have a good job lined up after graduation. This will allow you to repay your debt fast, reducing the risk of a rate increase.
The third step is about reconciling your debt and your circumstances in a budget, which should include — income permitting — automatic payments toward your loans. Hui recommends adopting like an aggressive approach toward debt repayment.
“Treat it like a challenge,” he said. “Think about bragging rights.”
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He recommends continuing to live “like a student” after school until you’ve eliminated your debt. While it may be tempting to ditch your roommates or buy a car, lifestyle inflation is what often causes people to struggle with their student loans for years and years, Hui said.
Finally, think about paying off your school debt as a trial run for adulting.
“It’s training for the rest of your financial life,” Hui said.