How to climb out of student debt

Jerome Couture thinks he ate about 20 free pizzas in a semester of university. Couture, a third-year systems design engineering student at University of Waterloo, found himself more than $1,000 in debt during his first year of university after underestimating the combined costs of paying for $15,000 annual tuition and living on campus.

By the end of his second semester, Couture was scavenging at as many campus events as he could. Groceries were no longer affordable unless they were on sale, and credit card debt was mounting.

Students paying their own way through school know too well the struggle to feed yourself while paying for tuition, rent and utilities — all while making little to no income. Many students like Couture now take out student loans and credit cards, so it’s easier than ever for debt to grow alarmingly high.

Kris Dureau, a Burlington, Ont.-based Certified Cash Flow Specialist (CCS), often guest speaks to Grade 7 classes about personal finance. He always makes sure to explain how credit cards work, since he says kids think their parents just tap a piece of plastic to buy whatever they need. This mindset carries into adulthood.

“Even adults forget what it’s like to spend $20 to $40 out of your own wallet,” Dureau says. “Electronic spending means people are forgetting what cash feels like.”

Implementing a cash flow plan helps with this. Having as much cash as you plan to spend on a given day or week means not spending more than what you have.

Dureau also advises students that just because you’re making money doesn’t mean you have to spend it all when payday rolls around. Save that money or put it toward paying down debt.

“It takes months to make money you can spend in seconds,” he says. In fact, if someone only pays the minimum payment on $1,000 of debt at 19%, it will take 164 months to clear it, and he will pay $1,275.03 in interest.

Brendan Gardner, the first CCS in Canada, says many students also mistakenly believe they have the rest of their lives to make money and pay off debt.

Doing it right

Rebecca Ananda is a 31-year-old mature student from British Columbia who graduated in April from Ryerson University with a journalism degree. Six months after graduation, she will have to start paying back her student loans, a total of $29,880 without interest. Living on her own in Toronto, she receives little financial support from her family. As a result, during her time in university, she relied on her school’s food bank. Ananda also worked several jobs at restaurants and bars, sometimes until 1 a.m. — even with 9 a.m. classes the next morning.

“The costs of living in Toronto plus monthly payments for student loans make it hard to take entry-level journalism positions,” Ananda says. “You don’t have a lot of flexibility in what you can do.”

Ananda feels restricted in the jobs she can apply to and what she can spend, but she’s making automatic monthly loan payments. That’s the right step, says Kris Dureau, a Burlington, Ont.-based financial advisor, instead of spending her income on everyday expenses and then hoping there’s money left to pay down her debt. “There have to be sacrifices,” Dureau says. “You have to be cutting back on things and saving money.”

Brendan Gardner, a Dauphin, Man., advisor, adds, “If you are finding payments difficult, don’t let it get to the point where the creditors start calling. Rather, be proactive and approach the creditors to explain your situation and work out a plan that will be beneficial to both parties.”

“If you drive down a main drag in the city you will likely see plenty of signs advertising low interest rates,” says the Dauphin, Man.-based advisor. “The reality of the situation is that interest rates don’t have as much impact as you think. The important thing is time.”

Students then end up carrying debt well into their careers, instead of paying it down right away, and accumulating more debt over a long period, say Gardner. Many students feel like they can finally start living after being in school and working on their degrees, so they splurge on a trip abroad, or on a new car. For instance, Dureau worked as a firefighter and paramedic after graduation. With a sudden surge in income, he decided to buy some toys – a motorcycle and a car.

But these big purchases on top of student loans can have negative consequences that will haunt you for a long time. Aside from growing interest, missed or late payments can destroy your credit score, making it difficult for you to take out loans to buy a car or a house later in life.

“I went through the adrenaline of having a lot of money,” Dureau says, “after being used to living on not very much.” Eventually, he realized he needed to sell his motorcycle and car to buy his first house.

The best thing to do, Gardner and Dureau agree, is to skip out on the big post-graduation purchases and immediately come up with a plan to pay off student debt after graduation by determining the length of time you want to take to pay it off (The Ontario Student Assistance Program, also known as OSAP, has a handy repayment calculator online).

“Things don’t get cheaper as you get older,” Dureau says. “Expenses increase and it doesn’t get easier.”

Gardner advises taking a hard look at fixed, day-to-day expenses, like transportation, housing, financial and medical obligations, and assess variable expenses that can be unnecessary, such as extra cable channels, expensive phone bills, and expenses that are emotional in nature, such as shopping for clothes, drinking, or going out to eat.

In Couture’s case, he did not factor in these discretionary expenses when he began his first year of university. He often felt homesick, taking frequent and expensive Greyhound bus rides back home. With groceries dwindling and debt mounting at the end of the year, he made a last ditch effort to climb out of debt.

“I took my credit card and froze it in a block of ice,” Couture says. “Then I took a Tupperware container, filled it with water, and put my credit card inside it and stuck it in the freezer.”

A few months later, Couture was debt-free and went to bank to replace the card.

“The chip broke,” he says. “And the guy at the bank just laughed at me. But I paid it all off.”