THE BTCHCOIN GUIDE TO STUDENT DEBT

Written by Emma Amaral and Katusha Saraiva

Contributors Emma Amaral and Katusha Saraiva break down the national picture on student debt – and how you can begin to tackle yours.

Young Canadians are in a difficult position when it comes to making smart financial decisions under the constraint of paying for post-secondary education. 2017 marked nearly three decades of steadily increasing tuition that has almost tripled since 1990, due to increased costs of educating each student and decreased government funding. Outside of Quebec, undergraduate tuition is now at a yearly average of $7,600 per year for domestic students (not to mention added fees and living costs).

This massive cost is getting harder for university students and recent graduates to pay off. According to a report published by RBC Economics this summer, thirty years ago it took students working minimum-wage jobs 293 hours to pay for an average year of tuition. Despite a jump from $5 to $13 in federal minimum wage, it now takes students 505 hours to pay for school. So it’s not surprising that over 20% of graduates with a bachelor’s degree graduate with more than $25,000 in debt.

The good news is that post-secondary education still pays off, in more ways than one. According to the 2015 median salaries of full-time employees, university graduates earned 63% more than high school graduates. University degrees also shield workers from unemployment, especially during economic downturns. This may also explain the increase in female enrollment in Canadian post-secondary education.

But this comes at a price, beyond tuition. The reality is that young Canadian graduates are suspending important milestones because of student debt, such as delaying a home purchase; having children; or getting married. These outcomes might be positive, negative, or neutral depending on the individual, but there are other consequences that are just plain bad: delaying things like paying off other debts; working in preferred fields; and saving for retirement, as well as having less money saved for emergency situations.

SO HOW CAN WE MAKE LEMONADE OUT OF THIS?

BE DILIGENT ABOUT TACKLING YOUR STUDENT LOANS

This one’s not easy. Student loans add exponentially more stress at a time when young adults already have a lot on their plates. However, facing student loans head on is the best way to minimize long-term pain.

  • If you are a student in Ontario and eligible for the Ontario Student Assistance Program (OSAP), consider claiming the bursary amount, and leaving the loan. This way you don’t have to pay anything back.
    • Whether you receive OSAP through direct deposit or are paying tuition out of your savings, keep due dates in mind so that you don’t end up being charged interest from your university.
  • If you are able to work part-time throughout your degree (or full time in the summer), try to pay off any loans as you go. For OSAP recipients, this will help you stay within the loan repayment grace period after graduation, before interest fees apply.
    • Beware of fees
    • If you decide not to apply for OSAP in your following year of study, do NOT forget to submit a Continuation of Interest Free Status Application! This will ensure that your previous loans remain interest free until the deferred payment is due after graduation.
  • Invest time in applying for all the scholarships, grants, and bursaries you can find. Applications are time consuming, but the potential payoffs are more than worth it. After checking with your school, look into websites such as Studentawards.com and ScholarshipsCanada.com.

SPREAD THE WORD

It may be too late for those of us who are already in school or recently graduated, but we can always educate our younger family members and friends to make smart financial decisions.

  • College education is an increasingly popular alternative to university, and enrolment has risen 33% since 2000. What makes this a smart option is lower tuition than university; a similar protective effect against unemployment; and an increasing return on investment. Over the past 20 years, the average income of graduates with a post-secondary alternative to university (such as vocational schools and community colleges) increased the fastest out of any educational group.
  • Consider attending university in Quebec or Newfoundland and Labrador. Because of increased provincial government funding, tuition is cheaper than the rest of the country. The average rate of tuition and fees (including out-of-province rates) for the 2017- 2018 school year was $3,736 in Quebec, $3,652 in Newfoundland and Labrador, and $8,500 in the rest of Canada.
  • Canadian parents could be making better use out of Registered Education Savings Plans, or RESPs. RESPs allow Canadians to accumulate tax-free savings and receive government grants to be used towards education.

Only 51% of eligible Canadians are benefitting from RESPs, and this group is skewed towards families that already have higher incomes.

  • In general, dedicated savings accounts for specific purposes such as post-secondary education are more effective than catch-all savings accounts that are more often dipped into.

OTHER WAYS TO IMPROVE YOUR FINANCIAL HEALTH:

1) AUTOMATE YOUR BANKING AND BILL PAYMENTS

You can ask your bank to automate the transfer of a fixed amount from your chequing account into your savings. A good default is a bi-weekly schedule that is synced up with your pay day, or whatever works best for you. You should also automate your bill payments (i.e. phone and credit card bills) to avoid late payments and interest fees.

  • With automated credit card payments, it’s easy to forget to peruse your online banking account. But you should still be checking your transactions regularly, to keep track of your spending and to spot anything irregular that you might want to flag.
    • For instance, your phone bill will be emailed to you in advanced, indicating the exact amount to be charged to your credit card and when. This way, you’re able to verify the transaction before it is posted.

2) GET A TAX FREE SAVINGS ACCOUNT (TFSA)

It might be too late for an RESP, but every young adult should have a TFSA. The interest accrued from this savings account is tax free, as are withdrawals (so you can save for a future big ticket item of your choice). Check with your bank to see what your contribution limit is and what you can afford to set aside, because the more you do, the higher return you will receive. Now is a good time to have this conversation with the new year just around the corner. Try and reach your maximum contribution limit (without going over) before the year’s end.

3) SWAP FAST FASHION FOR TIMELESS STAPLES

Online shopping has never been more tempting, with more and more ads popping up across our social media accounts. Self-control is key: stop spending money on fast fashion pieces that catch your eye, no matter how many paid instagram influencers are flooding your timeline. To reward your self-constraint, pick once or twice a year to indulge in a few investment pieces that will last you well into your career and never go out of style. This equals long term savings, and a healthier environment (fashion is considered one of the most polluting industries in the world, not only because of the production process that is water intensive and toxic, but think about how many Zara and Forever 21 pieces are chucked every year).

  • If you want a trendy item, you may want to make an exception to this rule and go to a cheaper store (if you really want that black choker necklace, best to opt for the H&M version considering you will probably only wear it a handful of times).
  • Your investment pieces should include business casual wear, ready to go for interviews or networking opportunities. Okay, and a purse 

4) KEEP RETIREMENT IN THE BACK OF YOUR MIND

This may seem insulting to those of us who haven’t even landed a full-time job yet. And just to be clear, you shouldn’t be saving for retirement until you’ve paid off your student loans. But once you get a full-time job, you should be asking your bank about opening an RRSP. The earlier you start to save, the more time you have to grow the pot (think compound interest). And if employers are willing to match your contributions in an RRSP, that free money should be fully taken advantage of. But keep those TFSAs around, because they provide you with more freedom to withdraw funds.

5) DON’T LET INVESTING INTIMIDATE YOU

In typical millennial fashion, there are more and more user-friendly options for investing that are geared towards young people. These apps have features such as automated customized investments synced with bank accounts, graphics that track cash flows, and curated lists of socially responsible investments. Even if you don’t currently have extra income to invest (after rent and student loan payments), try to keep yourself informed. Don’t be afraid to ask questions at your bank and do research online, getting comfortable with what your financial goals may be; what your timelines for these goals are; and how much risk you are comfortable with. But remember to run any big moves by a financial professional.

  • Although lagging behind the US, Canada will likely see an increase in these apps. Some things to consider include privacy settings and the security of inputting bank account numbers and passwords, and the old-fashioned value in manually adding up your expenses for budgeting purposes (all the Starbucks swipes seem to hit you harder). Apps that round up the total of every transaction and invest the difference can make investing much more convenient and attractive to young Canadians in the future.

6) CREATE A BUDGET – AND STICK TO IT!

Apps can do more and more for us, but don’t underestimate the value of doing a deep dive into your finances and spending habits yourself. The goal of creating a budget manually is simple: spend less than you make by becoming more cognizant of your purchasing habits. The first scary step is to dissect your bank statements to get a clear picture of where you’re currently spending your money as well as your financial health (i.e. your student and credit card debt). Next, create a monthly budget for expenses such as housing, transportation, and debt repayment in order of importance. Not only will this keep you on track for things like long term savings, but paying off debt but will make you more conscious of exactly how you are spending your hard earned dollars.

  • To make spending more salient, try giving up plastic altogether (debit cards included). In fact, according to a body of psychological research, paying with cash is more painful than paying with a credit card, so loss averse consumers spend less and are more attached to their purchases. Credit card users are also more likely to splurge on unhealthy products. Sticking to cash may grow increasingly difficult as we can now even pay with our smartphones and some businesses are moving towards no cash policies. We should pay close attention to whether we are trading convenience for more impulsive overspending.

TO SUM IT ALL UP:

The increasing costs associated with post-secondary education have resulted in many young Canadian students incurring debt. However, the financial burden of post-secondary education should not be prohibitive years after graduation. To make lemonade out of this otherwise sour reality, there are, thankfully, generally easy things we can be doing. For instance, being diligent about tackling student loans through early planning and short term sacrifices to become debt free as soon as possible. Or simply spreading the word about the realized cost of schooling and different funding options to save money.

The upside is that university graduates are still in a good spot within the country’s labour force, and apps are making investing and financial tracking more appealing and accessible to a younger generation of Canadians. Financial literacy is the first step to improving financial health and stability (kudos for reading this article), so stay curious about your finances and the Canadian economy at large because it is definitely not the same world that our parents moved through.

ABOUT THE AUTHORS:

Katusha Saraiva is a Bachelor of Commerce student in her final year of study at Ted Rogers School of Management with a major in Global Management. She is interested in marketing as it relates to business management, and had the opportunity to work for a start up company in the Fashion Zone – Canada’s first incubator for fashion inspired business this past summer.

Emma Amaral is a Master of Global Affairs candidate at the University of Toronto. She is interested in exploring topics related to digital technology, democracy, and human rights, and has been lucky enough to research these topics at the United Nations. Emma is currently enjoying a semester abroad in Paris at Sciences Po. Connect with her at https://www.linkedin.com/in/emma-m-amaral/