Student Loans: Making Informed Decisions | by Guest Author: Linda Stern, Licensed Insolvency Trustee.
The transition from home living to university can be an exciting one for young adults. It brings with it freedom and a chance to spread your wings. However, if you are not careful, this is precisely when the roots of life-long debt problems set in for the unsuspecting. Undergraduate degrees are not cheap. Two-thirds of Canadian students achieve this with government funded student loans or private loans.
Student Loan Ipsos Poll
An Ipsos poll conducted for BDO in September 2017 sheds light on what individuals, already carrying student loans, would say to someone considering one. The results are astounding! 77% of graduates under 40 regret taking out student loans. They would have either saved more or earned extra income by working while attending school. Others would have spent less and lived within their means.
Any prudent financial consultant could agree with this advice. Consider student loans as the last, not first, means to fund your education. Student loans take a long time to pay off. In Ontario, the average debt load at graduation is $22,785. A total of 18% polled believed their debt would last over 10 years! This burden arrives at a time when contract work is on the rise. It is also when you might want to consider other expensive lifestyle choices, like buying a house or starting a family.
The long term implications of debt problems on health and well being are well documented. Before you take out that student loan, consider all other options.
Saving for Education
Registered Education Savings Plans (RESPs) require long term planning and foresight. While not every family has the means to put money aside for their child’s education, RESPs will definitely cross every parents’ mind. They are not tax deductible like RRSPs. However, the government allows the interest to compound tax free. In addition, depending on your annual contributions, the government tops up the RESP with grants as an added incentive to save. Between the contributions, grants and compounding interest, RESP’s along with other private savings, can go a long way to minimize a child’s dependence on student loans.
RESPs are quickly becoming a gift of choice by grandparents. With younger grandchildren, astute grandparents are cutting back on their budget for material gifts, ensuring a small contribution is made to the RESP. As the kids grow, this “gift of education” transitions to becoming much more meaningful, not just for the grandchildren but for the parents as well.
Deferring Post Secondary Education
While this is not always top of mind with families looking forward to seeing their children finally venture into new pastures ahead, taking a year or two off after high school to save for your post secondary education is a very viable option. Ontario recently increased the minimum wage to $14/hour which goes up to $15/hour in 2019. These are very decent wages for young adults.
Retail, back-of-the-house busser jobs or weekend shifts at farmers markets have traditionally been starter jobs young adults could tap into. No doubt, they are harder to come by these days. University graduates and seniors are also vying for the same positions. However, there is little that can stand between motivated young adults and their money. What parents need to manage is a disciplined approach to saving while the teen is living at home to minimizing their long-term dependence on student loans.
Other Funding Sources
Recent changes to Ontario’s Student Assistance Program (OSAP), specifically Ontario Student Grants, makes tuition more affordable for low and middle-income students. In addition, colleges and universities offer scholarships based on merit, and bursaries based on need.
Many schools offer work-study co-op programs, allowing students to earn money during some school terms. And almost all colleges and universities have part time and summer job opportunity programs, on and off campus. Parents and students should investigate all these options during the school selection process.
Paying Back Student Loans
Taking out a student loan means that some day, in the near future, you have to pay it back. For Ontario students, the government offers a 6-month interest free grace period after you leave full time study. Hopefully the choices you made for your education will land you a job that pays enough to make the debt repayments manageable.
The troubles with student loans start when your job prospects are not apparent. Once the grace period is over, you will start feeling the squeeze. You may apply to Ontario’s repayment assistance programs that reduce your monthly payment options. However, all attempts to stall or slow down your payments are temporary.
You must put every effort into paying your student loan down. Regular payments will ensure the compounding interest rates remain in check. And this is also a very good way to begin building a healthy credit history to leverage future loans.
Student Loans: Falling Into Arrears
Government run student loans operate like any other loan. The Government will transfer the debt to collection agencies when your payments fall into arrears. Letters and collection calls could become your new nightmare. On top of this, all income tax refunds will be applied toward your loan. And most serious of all, your credit scores will be impacted. This brings a whole new range of problems to your table. Landlords may not accept you as a tenant; you could be denied monthly cell phone contracts. And if a credit check is part of an employment application process, employers may refuse to hire you.
If you are having trouble paying back your student loan, contact a credit counsellor. You should do this well before a collection agency is involved.
Consumer Proposals/ Bankruptcy
If the end of your study date is under seven years old, your student loan will not be forgiven even through the legal process of filing either a consumer proposal or bankruptcy. Your creditors will fully expect you to repay it. The interest will continue to accrue unless you are approved for interest relief through an application process.
Making Informed Decisions
It is therefore more important than ever to approach student loans like any other major purchase. You must weigh the benefits of your education and the job prospects ahead with the debt load you will carry. An education can be a very worthwhile investment. But changing economic times no longer make this the sure bet it used to be. Making informed decisions about your student loans will ensure you step into adulthood with the best possible financial start.
Linda Stern, a Licensed Insolvency Trustee, is a guest blogger for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.
If you enjoyed this blog, please consider sharing it.