Exhaust your options before taking out student loans: experts
Hunter Borsellino, 17 pushes a cart with some of her belongings towards her residence building at the University of Ottawa in Ottawa on Sunday, Sept 5, 2010 as student get ready for the new school year. (THE CANADIAN PRESS/Pawel Dwulit)
Published Thursday, July 19, 2012 1:16PM EDT
TORONTO -- Launching a career can be tricky when saddled with student debt, but borrowing to finance school may be unavoidable for some students -- and for those who don't qualify for government assistance, the added interest costs can be crippling.
Candace Simms, an English and political science major at Memorial University in St. John's, N.L., says that despite working multiple jobs through school, she will have to put off grad school to pay down her $15,000 credit line and $1,000 credit card debt.
"It's terrifying," says the fifth-year student, who plans to continue on to her master's and PhD. "It's going to be years before I can buy a house or start a family."
Simms, who doesn't qualify for government student aid, says she expects to have between $30,000 and $50,000 of debt by the time she's ready to start her career.
"The current formula for student aid is broken," says Simms, 23. "It takes a black and white approach to everything and that's not the case. So many students are in one of those grey areas."
Average tuition in Canada was $5,366 last year, and average student debt at graduation climbed to $18,800 in 2005 -- the latest year for which statistics are available -- from $15,200 a decade earlier.
Many students find themselves turning to credit cards and lines of credit because they aren't eligible for student aid, which is determined using a formula that takes into account how much their parents should be able to contribute.
Financial advisers offer these tips for the cash-strapped student looking for ways to fund school.
1. Exhaust your options
Taking on debt from a financial institution should always be your last choice after all other options have failed, says Kurt Rosentreter, a financial adviser with Manulife Securities.
"You can't be 30 years old with $50,000 to $100,000 in student debt and hope to get started on your real-life goals any time soon," said Rosentreter.
"If you're going to take on so much debt that effectively it's going to make the rest of your long-term goals impossible, I think you need to dwell on that, and even contemplate how much school you're going to take."
Consider taking on several part-time jobs or stretching out your degree over a longer period of time to avoid getting deep into the red, says Rosentreter.
When possible, choose student aid over a term loan or a credit line from a financial institution because government loans are interest free while you're in school and for six months after you graduate.
Think about borrowing money from family, who can make you sign legal documents if they're worried about repayment.
2. Be realistic about your budget
Tom Lumsden, director of education financing at RBC, urges students to create a realistic budget so they understand the full cost of going to school, including living expenses.
Doing so can prevent you from running out of money prematurely.
"Next to your home, this is the biggest financial investment that you're going to make in yourself, so you need to make sure that you do the homework on what you really need," says Lumsden.
"Unexpected things happen, and if you've got a budget and you're prepared you can usually work your way through the rough patch."
Make sure you also look into average salaries and future job prospects in your chosen field of employment, says Rosentreter.
"It's kind of ironic because you're talking about going into debt to get education to get a better job," he says.
"But if you take on so much debt and the education doesn't get you the sweet job you need to repay the debt, you could dig a bigger hole."
3. Pick a line of credit over a term loan
A credit line is more suitable for students because it allows you to draw out money gradually as you need it, rather than receiving all the cash in one big chunk that starts accumulating interest immediately.
A student line of credit also allows more flexibility in repaying the money, whereas a term loan has fixed payment dates.
And with a line of credit, you only pay interest on what you borrow, so if you don't withdraw all your money at once then you end up saving on interest.
Lumsden suggests working each summer to pay down the line of credit, so you can graduate with less debt.
4. Choose flexibility over low interest rates
The most important feature to look for in a line of credit is flexibility in getting the money and in paying it back, says Rosentreter.
Your repayment terms should extend over many years as your career takes off, says Rosentreter.
"If you have to pay a slightly higher interest rate to get the flexibility you need, I would do that," says Rosentreter.
Sometimes securing your line of credit behind an asset -- like your parents' house or an investment account -- can get you a lower interest rate because the lender doesn't take on as much risk, says Rosentreter.
5. Be careful with credit cards
While turning to credit cards can be easy when you're in need of quick cash, those cards can have exorbitant interest rates, says Rosentreter.
And piling on the cards as you max each one out can be detrimental to your credit rating, he adds.
"Interest rates on those credit cards can be among the highest in the world," says Rosentreter.
"Unless you're aggressively paying those cards down, you could head towards personal bankruptcy real fast."