Students are increasingly taking on larger debt loads to help finance the rising cost of post-secondary education. A recent survey by Bank of Montreal found 58% of students expect to graduate at least $20,000 in debt, while 21% will graduate more than $40,000 in debt. I recently appeared on The Pattie Lovett-Reid Show to discuss student debt – here are a few tips to be debt-free sooner.
1. Live Frugally
Just because you can afford to go out and buy an expensive house and a fancy car, that doesn’t mean you should. Make paying down student debt a priority. If you are burdened with student debt, continue to live like a student even after graduation – save on rent with roommates or live with your parents until your debt is under control.
2. Develop a Budget
For most students, college and university is the beginning of the road to financial freedom. It’s crucial for students to watch their discretionary spending and develop a budget. Spending $3 a day at Tim Hortons may not seem like a lot, but it adds up to $90 a month. A budget is a great way to watch spending. If you know what your fixed costs are (rent), you can watch your discretionary spending and put the rest towards paying off student debt.
3. Pay Yourself First
Setting up an automatic payment plan is a another way to be debt-free sooner. The money comes right off your pay cheque before you’re tempted to spend it. Set up is easy – create a budget to figure out how much you can afford to put towards debt and have the funds automatically deducted off your pay.
4. Land a Well-Paying First Job
Remember why you attended college and university in the first place. Landing a good first job is key to paying off student debt. Internships are a great way to develop relationships with potential employers prior to graduation. Although your final year at school may be hectic, start applying for jobs at least 6 months prior to graduation and visit your school’s employment centre to fine tune your resume. Once you land your dream job, increase your loan repayment amount yearly with salary increases and use bonuses as lump sum payments.
5. Avoid Debt in the First Place
Why be in debt when you don’t have to be? If your course load permits, part-time and summer positions are great ways to pay down debt before interest starts accruing. You can often gain well-paying work-study positions on campus. Bursaries and scholarships are also great sources of funds. Make lump sum payments while you’re attending school – they will have the greatest effect, by going directly towards principal.
6. Know your Loan Payment Terms
Understanding your loan payments terms is crucial for paying off your debt sooner. It’s important to know the total amount of your loan, interest rate, monthly payment amount and amortization. There is a 6-month grace period – you don’t have to make monthly payments until 6 months after graduation, although interest will start accruing when you graduate. Start paying your loan right away to save on interest.
7. Fixed vs. Floating Interest Rate
When you graduate you’ll choose between a fixed and floating interest rate. A fixed rate (prime plus 5%) guarantees the interest rate for the duration of your loan, but you’ll pay a higher interest rate, while a floating rate (prime plus 2.5%) saves money up front, but could end up costing you more if interest rates rise. If you expect to pay off your student loan in less than 5 years it usually makes sense to go with the floating rate – it’s a good idea to set your payment amount at the fixed rate to prepare yourself if interest rates rise.
8. Don’t just make the Minimum Monthly Payment
By paying as much as you can afford you’ll save hundreds of dollars in interest. Any amount paid above your monthly payment goes directly towards principal. For example if your monthly payment is $300 and you instead pay $450, the extra $150 is applied directly to principal, saving interest and shortening your loan amortization.
Although student debt is cheap relative to other forms of debt like credit card, being debt-free sooner is a rewarding experience and lifts a weight off your shoulders. It allows you to begin planning the rest of your life. Why be in debt for 10 years like most graduates when you don’t have to be?
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.