What you’d do to pay off student loans—and what you should be doingSep 22, 2015
It appears that some university grads are willing to go to great lengths to pay off their student loan debt. According to recent reports, 25 per cent of students in the U.K. take part in experimental clinical trials, 31 per cent in the U.S. would eat nothing but ramen (with 11 per cent adding a side of giant spider) to eliminate debt, and 55 per cent would turn their lives into a reality TV show. But while some of these ideas seem silly, student debt is a serious issue for the younger generations. In Canada, graduates are burdened with an average of $27,000 in student debt, which takes about 10 years to pay off. With many millennials forced to delay major life decisions due to debt, is it any wonder some would gladly take an extreme, instant-gratification approach to debt reduction?
For those still in school, the costs of education are rising. Although Alberta and Newfoundland froze their tuition fees, the national average rose 3.2 per cent to $6,191 this year. And certain programs are much more expensive—it costs $18,934 a year to study dentistry, for example. Throw in the cost of textbooks, living expenses and a meal plan—for those who aren’t able to save money by living at home—and it’s not hard to see how recent grads can end up owing more than their starting salary when they enter the workforce. In fact, one law student in Ottawa is just finishing her program with $150,000 of debt.
Canadian household debt has recently risen to just under $1.65 for every dollar earned, and the government is looking to get more aggressive in collecting on student loans. With Canadians under 45 already dealing with GenSqueeze—a plethora of financial challenges including less government spending on them than their elders—they could soon be squeezed even tighter. In the U.S., presidential candidates have announced plans to address their nation’s $1.3-trillion student-loan debt. But so far, in Canada, indebted Canadian households and students seems to be lost in a larger economic discussion during this campaign, as political leaders debate whether or not Canada is in an economic downturn. Addressing student debt doesn’t seem to be a priority in this election, although there has been some discussion on the topic.
To date, the political parties have made a few proposals to deal with student debt. The Conservatives pledge to stop cutting financial assistance to students who work while they study and extend eligibility for student grants to those studying in shorter programs. The Liberal Party intends to create a Canada Service Corps that will pay off $1,500 of student debt for those who spend 150 hours volunteering. An NDP MP introduced a Private Members’ Bill in June for a national strategy to reduce student loan debt, but the bill had yet to be debated before the election was called. The Green Party has made student debt a key part of its election platform, promising to abolish tuition fees by 2020 and eliminate all federal student debts greater than $10,000.
And yet, student loans will remain a necessary evil for the foreseeable future, and dealing with them remains a challenge. Although graduates (or people who’ve otherwise ended their post-secondary studies) have a six-month grace period to start repaying their loans, interest still accumulates on Canada Student Loans during that period. So you’re not freezing federal payments if you don’t start paying them back right away.
That said, most provinces offer some sort of Repayment Assistance Plan, which can lead to revised payments based on gross family income and the potential of up to 15 years of interest relief. You could also apply for loan forgiveness based on your profession—for instance, both the federal government and the B.C. provincial government offer loan forgiveness to nurses.
While a bank line of credit might offer a lower interest rate, consolidating your debt in this way is not necessarily the best solution. Although you can claim a tax credit for the interest paid on student loans, it does not apply to personal loans, lines of credit, or student loans combined with another kind of loan. Not to mention that you can’t get a Repayment Assistance Plan on a bank loan. You might be better off talking to a tax advisor about the tax implications of your student loans.
While recent grads might wish they could just eat a spider and make their student loan debt disappear, they’d be better off making at least the minimum payment to keep their loans in good standing. They should also apply for a revised payment plan or interest relief from their federal or provincial government. The good news is that studies suggest university grads still typically find higher-paying jobs, which will allow them to make larger payments on their student debt after they enter the workforce.
How are you dealing with student loan debt? Share your thoughts with BDO by joining the conversation on Twitter using #LetsTalkDebt #BDOdebtrelief