Student Debt 101: The Class You Wish You Took During Your Degree

BlostPost - studentdebtGraduation from a post-secondary program can be an emotional time. You feel proud that your hard work has paid off, sadness from leaving the people and place that you’ve spent so much time, and excitement for what is to become during your journey into adulthood.

Fast forward six months and things begin to become a little less shiny and new. Maybe you’re working in your field of study, maybe you’ve taken the year to go traveling, or maybe you’re working a minimum wage job trying to make ends meet. Next thing you know the federal and/or provincial government or the bank that lent you your student line of credit come knocking for payments. This introduces or enhances another popular emotion among recent grads: stress.

According to Statistics Canada, the average tuition for a Canadian university — before the cost of books, travel and supplies — is $6,500 per year. This means while new students are worrying about gaining the freshmen fifteen, graduating students have to worry about gaining the post-degree twenty – as in the $26,000 the average Canadian graduate owes in student loans. Keep in mind this number doesn’t include any consumer debt, like credit cards and lines of credit, which the student might have also acquired over their time at school.

WHAT DEBT TO EXPECT

When you hear financial advisors talk about “student debt”, they are typically discussing two areas of debt that graduates tend to face:

  1. The repayment of their federal and provincial student loans used to fund their tuition, books and other student related expenses and,
  1. The repayment of a growing consumer debt, like credit cards and student lines of credit.

While grads might feel pressure to repay their student loans, this isn’t the only financial sore spot they have to worry about. Repayment of student loans can usually be managed under the government’s Repayment Assistance Program, which is paid at an interest rate lower than the interest rate charged on bank loans and credit cards, e.g., prime = 2.95% +5% (fixed) or +2.5% (floating). An average student loan interest rate is roughly 6-8% compared to the 19% or higher rate on credit cards. The real pressure comes from the growing consumer debt – averaging $18,000 – that graduates have to pay back on top of their student loans.  The reality is that the overall debt a student may need to repay upon graduation could exceed $40,000. 

ARE YOU IN FOR THE LONG HAUL?

The amount of time it will take to pay off student debt will depend on what you can afford and when you can afford it. Immediately upon graduating, there is a six-month grace period until you have to begin making payments towards your student loans; however, interest will still accumulate during that grace period.

To give you an idea of the numbers, if you can afford a payment of $530/month in your budget, it will take you 5 years to pay off $26,000 in student loans at a fixed interest rate (prime + 5%).  If you can only afford a payment of $315/month, it will take you 10 years to pay off the debt under the same interest rate terms.

The reality is, it’s taking closer to 10 years for grads to pay off their debt as they experience challenges in finding the right job at the right pay, right away. Whether it’s due to the economy or a competitive workforce, some grads must work unpaid internships or minimum wage jobs which delays the repayment of their debt.

TIPS OF THE TRADE: PAYING BACK STUDENT DEBT

After you figure out how much you owe in total (this includes your government loans, credit cards and lines of credit), it’s important to prioritize the amount for each payment based on how much interest you’re being charged.  Plan to put more towards the higher interest rate debt which will most likely be your credit cards.  Your bank should have an online “loan” calculator which will help you figure out how much you owe. Once you have your debts organized, follow these helpful tips to keep your payments on track:

  1. Make your payments on time. Student loan payments will affect your credit report. Missing your payments or paying them late will impact your credit score and rating. It’s important to remember how your rating will make you look to lenders when you apply for future loans and/or mortgages.
  1. Practice “paying yourself first”. This might seem impossible while you’re paying down student debt, but having a cushion of savings for emergency expenses will help you avoid dipping into more credit. You might also want to increase your monthly payments as your income increases. Setting up a direct deposit to transfer payments to your student loan will ensure you stay on track with tackling the debt.
  1. Make use of the Repayment Assistance Plan (RAP) by contacting the National Student Loans Centre or your provincial student loan office.If you find yourself struggling to make payments, you may be eligible for a reduction on your monthly payments through the government’s RAP. If you qualify, your monthly student loans will be reduced or you won’t have to make any payments, depending on your financial situation.
  1. Don’t forget to claim a non-refundable tax credit on your income tax return for the interest paid on your student loans.

If you’re currently a student with a few years left in your education, it’s not too late to graduate with minimal or at least manageable debt. Be proactive and budget!  Live within your means and seek out creative ways to live more frugally as a student, like using your circle of friends as a support network since they will more than likely be in the same boat as you.  Seize opportunities to earn income during the spring and summer breaks and, lastly, avoid signing up for credit cards or lines of credit. Focus on managing the cash you have available.

Planning to maintain a debt for as long as ten years can make acquiring additional debt overwhelming. If you’ve incurred more debt than you can manage, contact a Licensed Insolvency Trustee. We will be able to explore all the options available to you, including bankruptcy and consumer proposal filings, which can dissolve student debt after you have been out of post-secondary education for seven years.

Freida Richer LIT

 

Freida Richer is a Licensed Insolvency Trustee with our Edmonton, Alberta practice. You can watch her Money Smarts segment on the third Monday of every month on Global Morning News Edmonton.

When Common-Law Means Common Debt: Dealing With Debt In A Common-Law Relationship

BlostPost - CommonLawDebt

Common-law relationships are on the rise in Canada. According to Statistics Canada’s most recent census, more than a fifth of Canadians were living in a common-law situation in 2016 – up from just 6.3 per cent in 1981.

While the government may look at common-law situations differently than marriages, money and debt are major contributors to stress in any relationship no matter the marital status.

WHAT’S A COMMON-LAW RELATIONSHIP?

The definition of a common-law relationship varies from province to province.  In Alberta, my home province, common law couples are legally referred to as “adult interdependent partners” under the Adult Interdependent Relationships Act. You’re considered to be in a common law relationship after living together for three years or sooner if you have a child together.

It’s important to know that the federal government has a different interpretation of what’s considered common-law status. The Income Tax Act considers you to be in a common law relationship if you’ve lived together for 12 consecutive months.  You must file your income tax return based on this rule to ensure that you’re filing accurately and don’t create any issues with Canada Revenue Agency.

WHEN DOES COMMON-LAW MEAN COMMON DEBT?

Someone typically becomes responsible for their common-law partner’s debt when they have agreed to be one of the following:

  • A Co-Borrower or Joint Applicant: The most typical type of co-borrowing is applying for a mortgage together. In this case, you and your partner are held equally responsible for repaying the mortgage to the bank or lender.
  • A Co-Signor:  Consider yourself the “backup” for the bank or lender if your spouse or partner, as the primary applicant, defaults on payments or is unable to pay what is owed.  Having a co-signor is security for the bank or lender and is generally used when the primary applicant has a poor credit score or rating.
  • A Supplementary Card Holder: Your spouse or partner may request the credit card company issue an additional or supplementary card to you so that you can be an “authorized user” on the account.  Although this offers convenience for the couple, the downside is that both might be jointly responsible for the balance owing on the credit card.  It’s important to read the fine print before using the card as a supplementary authorized user.

INSOLVENCY IN A COMMON LAW RELATIONSHIP

When we looked at our data over the last four years, approximately 10% of consumers across Canada who filed with Grant Thornton Limited were common-law couples. Although married couples represented the highest percentage of consumer proposals and bankruptcies filed with us, people in common-law relationships expressed the same fears and concerns as most married couples do.

During our free consultations, consumers in common-law relationships generally ask these questions regarding how their debt may affect their partner:

  1. If I file a consumer proposal or bankruptcy, will my creditors go after my partner? If you brought debt into the relationship, a common-law relationship does not automatically create joint responsibility for the debt. If the both of you apply for new debt together, like a joint loan with the bank as co-applicants or if one partner co-signs for the other, then both partners are equally responsible for the repayment of the debt.
  1. Does my low credit rating or score automatically affect my partner? Firstly, the two main credit bureaus in Canada, Equifax and TransUnion, maintain credit reports for each person separately.  Credit ratings measure your behaviour with credit (e.g., late payments) from an R1 rating, which is excellent, down to an R9 rating, which results when a bankruptcy is filed.  When a couple acquires joint debt, their individual credit ratings are affected based on whether they make their payments on time and repay the debt according to the terms of the agreement.

If one partner has an excellent credit score of 750 while the other partner has a poor credit score of 500, it will be more difficult for the couple to qualify for a joint loan since the lender will view the credit scores collectively.  Credit scores represent how much of a risk you are to a lender based on payment history, length of credit history, etc. – the higher your score, the less of a risk you are.

If your partner resolves their debt through a Consumer Proposal or Bankruptcy filing, it’s a journey that the both of you will no doubt face together in terms of support—however, aside from that, your involvement stops there.  You won’t face the responsibility for your partner’s debt or the negative impact on your credit report as long as you’re not a co-borrower, co-signer/guarantor or supplementary credit card holder.  Your spouse may be required to report his or her income to the Trustee; however, it is your right to not disclose your income.

If you’re having issues with debt and are in a common-law relationship, it’s important to be open about your finances with your partner. Debt carries an emotional weight on any relationship. It’s important to talk to your partner about your current financial challenges, so you’re both on the same page when it comes to your financial goals as a couple.

If your financial situation has reached a point where you cannot continue to pay your debt, talk to a Licensed Insolvency Trustee.  We understand that debt happens, and during a free one-hour consultation we will assess your financial situation and discuss the options that will work best for you.

Freida Richer LIT

 

Freida Richer is a Licensed Insolvency Trustee with our Edmonton, Alberta practice. You can watch her Money Smarts segment on the third Monday of every month on Global Morning News Edmonton.