Actualis



July 2011
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Student loans:  “good” debt?

This summer, thousands of young Canadians will receive their degrees... and the little memo that comes with them:  time to start repaying that student loan. Don't panic! Managed properly, this debt is actually a sound investment.

A visit to the Canadian Federation of Students Web site http://www.cfs-fcee.ca will give you an overview of student debt in Canada. The CFS “debt clock” shows the growth of student debt in real time. At the time of writing, the total was approaching $14 billion from the federal level alone.

At first glance, this picture doesn't look too good. But in fact, with the right liability management strategy, a student loan can make a lot of sense.

Not your usual debt 

That's because a student loan isn't like other kinds of loans. It is a debt incurred to obtain a diploma that will eventually translate into thousands of dollars of additional income. It is also a debt that carries a low interest rate and gives access to a tax credit. Compare that with a loan incurred to buy a car or a television:  not only does the underlying asset lose value every year, but the interest - at a higher rate - isn't tax deductible. Looking at it this way, if there is such a thing as good and bad debt, a student loan definitely falls into the “good” category.

If you are starting to repay your student loan, it would be a good idea to begin by drawing up a management plan for all of your liabilities. This plan should provide for the rapid repayment of your “bad” debt, such as consumer loans, even if it means taking more time to repay your “good” debt - such as your student loan. If you haven't spent all of your student loan, it might even be appropriate to use it to pay off a bad debt, rather than immediately paying down the student loan itself:  rushing to clear your student debt makes no sense if it means taking longer to pay off your car!

But debt nonetheless

Obviously, though, a debt is still a debt. If you already have a strategy in place, give priority to your “bad” debt, and still want to make your student loan a thing of the past as quickly as possible, consider the following tactics:

• Once finished their education, graduates have six months before they have to start making loan payments (although interest still accrues during this period). Take advantage of this grace period to pay down the principal as much as possible.
• The government calculates monthly payments based on a set term. If you have additional money coming in, use this to increase your monthly payments or to repay some of the principal.

On the other hand, if your overall debt, including your student loan, is just too much for you, keep in mind that you can lengthen the term of your loan (from 10 years to as much as 15 years), which will reduce your monthly payments. As well, the government allows each graduate to be temporarily exempt from paying interest if jobless or stuck in a poorly paying job. 

What it comes down to is making sure that a loan incurred to pay for your studies doesn't become a burden. Don't lose sight of the fact that people with university degrees have historically done better in the job market than those who don't pursue higher education. A degree costs money - but it's also very valuable!



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