If you’re a Canadian graduate who’s taken out a student loan, you’re well aware of the student debt crisis our country is facing. In 2018, more than half of Canadian bachelor’s degree students graduated with student debt, averaging about $26,000. The good news is that the Canadian government has initiated a large student debt relief program, especially in light of the COVID-19 pandemic. Temporary relief measures as of April 2021 include that no interest will be charged on Canada Student Loans.
Of course, that still leaves your provincial and private student loans. Don’t worry though, because we’ve got you covered with some great tips for paying off your student loans.
Tip #1: Understand your student loan
As important as it is to pay off your student loans, it’s crucial to understand the terms of your loan. You’d be surprised at how many people do not really know the details of their student loans. So, here are some key features of your loan to keep in mind.
- Loan principal: Your loan principal or principal loan amount is the actual amount that you borrowed as your student loan.
- Interest: When you take out any kind of loan, you have to pay a certain amount of interest on it. A simple way to understand interest is with this example. Suppose you were to borrow $10 from a friend. Now, they say they will lend you the $10, but you need to pay them back $2 extra as a fee for lending you the $10 you need. That $2 is the interest amount on your loan of $10.
- Interest rate: The interest rate determines how much of the principal amount you will pay back as interest. In the example above, where you had to pay $2 as interest on a loan of $10, the interest rate was 20%. Of course, the lower the interest, the better. Interest rates can also be fixed, or variable. A fixed interest rate would remain the same during the loan duration, while a variable interest rate can fluctuate.
- Loan term: This is the duration of your loan from when you take it out, to when you’ve made your final payment. Do not confuse your loan term with the terms of your loan which include the interest rate, payment schedule, payment amount, etc.
- Grace period: This is a special element of student loans. For federal student loans, students are granted a six-month grace period on loan repayment after they graduate. This means, they only need to start repaying their student loans six months after graduation.
Tip #2: Plan your financial future
Now that you’ve understood the main features of your student loan, it’s time to start planning how you will repay your student debt. As a first step, you need to look at the big picture and ask yourself a few questions. What are your main goals regarding your finances? Do you want to build your savings? Do you want to take some risks and invest to get high returns? Is building wealth a priority or is paying off all your debt more important to you? How is your credit? Discuss your goals and priorities with a financial advisor, or maybe even that friend who’s a Finance Major. Whatever you do, do not ‘just wing it’. The steps you take at this stage of your life will set the foundation for long-term financial success — or failure.
Tip #3: Build and stick to your budget
Once you have your financial goals and priorities in place, it’s time to make a plan for how you will achieve them. When it comes to your finances, that plan means creating a budget. First, make a yearly budget that includes all your expenses, incomes, debt, and savings. Then, break that down into a monthly, weekly, or even daily budget. The more details and categories you have, the better. Really account for where every dollar will go - starting from the basics you absolutely must pay like your rent, utilities, insurance, and loan payments. Once you’ve slotted those in, make it a point to keep money aside as savings or put into an emergency fund. Only then allocate money for extra things like dining out, clothes, travel, and entertainment. Remember, making a sensible budget is only half the battle, the other half is actually sticking to your budget. Do both and you’ll be able to conquer your student debt without worry.
Tip #4: Make payments during your grace period
One easy way to pay off your student debt faster is to start making payments during the grace period itself. When you start repaying your student loans after your grace period, the payment goes towards paying back both the principal loan amount and your interest. However, any payments you make during the grace period only go towards paying off the principal loan amount. The lesser your loan amount, the lesser interest amount you will have to pay in the future. So, if you can afford it, make payments during your grace period.
Tip #5: Increase how much you pay
Another tip to pay off your student loans faster is to increase the amount you pay each loan payment. Increasing the amount will help to reduce your loan term. A shorter loan term means you will have to pay less interest, shrinking your overall student debt. You can customize your Canada Student Loan payments. Make sure to select the ‘Update Payments’ option.
Tip #6: Increase how often you pay
If you don’t think you can increase your monthly payments, increase the frequency of your payments instead. Switch from monthly payments to weekly or even bi-weekly payments. Increasing how often you pay has two main advantages. Firstly, the smaller individual payments are much easier to manage than a large payment once a month. The second advantage is that you will be able to pay off your loan faster. This is because you end up paying up to a month’s more of payments per year when you increase your payment frequency. Over time, those months will add up, considerably reducing your loan term.
Tip #7: Make your payments as scheduled
If you can’t afford to take advantage of tips 4, 5, or 6, don’t sweat it. Those are ways to pay less or pay down your student debt faster. The one thing — in fact, the most important thing — you should do, is ensuring you make your payments as scheduled. This is crucial because how you pay your student debt can affect your credit ratings. Missing payments or making late payments reflects badly on you as a borrower and will negatively affect your credit rating. A low credit score makes it harder to get favourable loans in the future. So, while getting a degree or going to school was a good way to build a better future, defaulting on your student loan payments is a sure way of damaging your financial future.
Tip #8: Consolidate your student debt
Struggling with student debt and wondering, how to deal with different student loans? This is a common worry for most people who have graduated a few years ago and are finding the burden of their student debt to be too heavy.
The COVID-19 pandemic has greatly affected everyone’s physical and mental health while compromising most people’s financial health as well. If you relate to this situation, then one great option is to consolidate your debt. This means you can take out an online loan (like a personal loan or a student debt consolidation loan), and use it to pay off all your various student loans. This way, you will only have to make one payment to your new loan, rather than pay towards many different loans. It’s easier to keep track of payments, manage your finances to ensure payments are made, and is less stressful, too. It’s also a great way to build your credit score.
Tip #9: Ask the Government of Canada for help
If you’re truly unable to make your student loan payments, then you can apply for the Government of Canada’s Repayment Assistance Plan (RAP). Depending on how much you earn, your payments will be reduced. The RAP will ensure that you won’t have to make any payments if your payments are 20% more than your income. If your income is too low, you may not have to make any payments at all. You are eligible for RAP as soon as you graduate and you can apply for this Repayment Assistance Plan at any time during your loan term. You can learn more about the Government of Canada’s Repayment Assistance Plan, on the official website.
Whether you’re a recent graduate or have been finding it difficult to repay your student debt for a while, we hope you find our tips for paying off your student loans helpful. If you’d like to explore online loans for yourself to consolidate your student debt or speak to an expert financial advisor to chalk up a repayment plan, please reach out. It’s what we’re here for!