I was sitting in Sir James Dunn Hall drinking my coffee and people watching as I usually do when I overhear two students discussing their student loans, comparing how far they stumbled down that rabbit hole. The conversation went like this:
“I don’t know what I’m going to do when I finish. I’m already $20,000 in debt.”
“If you think that’s bad I’m $60,000 in debt and a student line of credit on the side.”
The conversation went on with each student trying to top the other about how desperate their situation was. I figured this level of self-deprecation merited some advice on how to tackle student loans.
Our generation is already in debt at unprecedented levels. With financial problems swirling around pensions and retirements fund, we need to get our house in order before we can even think about long-term financial security.
Step one is determining how much you owe. Keep in mind there are repayment calculators, http://tools.canlearn.ca/cslgs-scpse/cln-cln/crp-lrc/af.nlindex-eng.do. This tool can help you understand how much you owe. It could also give insight into how much interest rates can impact the loan.
Using the student loan calculator at $20,000 of debt and a pay-back span of 10 years or 120 months; the calculator says, given current interests rates, the student would end up paying $29,118.68 by term. This is a fixed rate interest rate and a prime rate at 3 per cent. Prime rate is the interest rate a bank gives to more trustworthy customers. In the end the student would pay $242.66 a month and interests charges during that span would amount to $9,118.68.
The next step is budgeting payments in your monthly plan. Depending on how much you make, this could be difficult. We’ll go with a 40-hour work week at minimum wage, pulling in $1,400 a month, or a rough salary of $16,000 a year. To pay off the loan of $20,000 in 10 years, the person has to pay $242.66 a month. This means they would be left with $1,157.34 for their other expenses. Also given the interest rate at this pace, the person would be paying the monthly amount for 37 extra months – more than three years.
That brings me to my next point. Any other money saved should go toward tackling the lump sum to pay it off quicker. These numbers assume the student lands a minimum wage after school. But if we can believe, as Forbes reported, that graduates with liberal arts degrees start with a salary of $40,000 a year on average,. then a student could pay it off in half the time with the proper budgeting.
With the same interest rates, to pay off the loan at 60 months and five years, the monthly payment is $405.53 and the interest total after five years would be $4,331.67. A grand total of $24,4331.67 would have to be paid back, meaning just paying the minimum would add only an extra 10 months to the term..
Anyone attempting to pay off their debt should realize it’s a long process. It may seem daunting in the beginning, but a mountain of debt can be slowly overcome if it’s broken down. The key is planning.
Oh, and having an income source to pay for it.