Graduating with the Burden of Debt

Depending on whether a student lives at home or away, the cost of a four-year university education ranges between $40,000 and $85,000. Long gone are the days when a student could fund their own education with summer jobs. Many families cannot afford to pay the tuition bill, and the student is forced to rely on the aid of government-sponsored loans. A 2011 report by TD Economics notes that at least 26% of students are taking on government-sponsored debt, and there are untold numbers who are borrowing from family, friends, and private sector lenders.

Don’t expect the costs to go down. With inflationary pressure, we can only see the cost of education rising from here. So there are two questions that need to be considered. First, is taking on all this expense and debt really worth it? And second, what plan does the student have to pay off the loans?

The TD report suggests that the cost of higher education is definitely worth it. More than 77% of students who graduate with a post secondary education are actively working in the labour force. When compared to the high school graduate who may have some post secondary education, the figures drop to 67%. For those who did not complete high school, the number drops to only 40% who are actively employed.

Now let’s look at salaries. The 2006 Statistics Canada Census showed that in 2005 the median earnings for those with no educational certificate or diploma were approximately $15,500 annually. For those with a high school diploma it jumped to $19,700. With a College certificate, the increase jumped to $27,700. And for those with a university degree, the median income was just over $35,000.

Let’s translate these numbers into a return on investment. The salary difference between the high school diploma and college certificate is about $8,000. That represents an annual return of about 10% or more depending on the total cost of education. The return jumps significantly when looking at the salary increase for a university degree.

So clearly the investment in education appears to be worth it. But for those who have had to rely on debt to fund their education, there may be a bigger problem: how to pay it off . The priority is to establish a repayment plan. The student must understand that they have a responsibility to creditors, and this was not a gift from the taxpayer.

There are a few things to consider when developing your debt repayment plan. First you should know the rules of government loans. When the student graduates there is an initial grace period of six months before the official loan payments must begin. This is not an interest-free holiday. Interest accrues from day one after graduation. If the student is lucky enough to secure a job within the first six months, it is recommended that payments be made on the loan as soon as possible. Not only will this lower the principal and reduce the balance on which interest is calculated, but it will also begin the development of good habits and a positive attitude toward debt repayment.

When the payment schedule is determined, the student can look at his or her income and decide if it makes sense to put a little extra on the loan each month. If the payments are set at $150 per month and the graduate decides to add an extra $100 per month, years of payments could be shaved off the loan. This is much like making extra payments on a mortgage. You can knock years off the amortization period by simply upping the payment by a few bucks.

Finally, don’t forget about the tax credit that applies to interest paid on student loans. You get a federal and provincial tax credit for each dollar that you pay in student loan interest. Any unused credits can be carried forward for five years. These credits are only available for federal and provincial loans. If the loan is refinanced, the credit disappears.

Of course it’s up to the student to apply the knowledge gained through education and obtain the best career and salary possible. This way the investment in education will be valuable and the debt repayment will be less of a burden.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail Mutual Funds provided through FundEX Investments Inc.

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