Worried your university education is starting to seem more like an unshakable ball-and-chain of debt and not the eventual big pay off that it was supposed to be? Vv Magazine talked to Certified Financial Planner Steve Santoro of Santoro Financial Group to get the lowdown on the realities of student debt in the 2015 job market, and why the education bubble is the next to burst.
Getting a post-secondary degree is a big accomplishment, but it comes with a hefty price tag, quite literally. Tuition for an undergraduate degree in North America now costs 400% on average more than it did in 1990. Despite the substantial price jump, the number of university graduates has continued to grow over the last decade, even though the job market hasn’t exactly been shifting to accommodate the impressive academic merits of the Class of 2015. To put it in grade 5 math terms, the number of new grads exceeds the demand for their skills. Given that many job seekers these days are also burdened with massive student debt, the current unemployment and underemployment rates are all the more devastating to the economy as a whole.
Even university grads lucky enough to score jobs in their field haven’t exactly escaped the higher education bubble unscathed. Salaries have only increased on average by 20% in the past 25 years — a modest amount in light of the 400% rise in tuition fees — which means putting a dent in student loan payments is a far-off dream for even the employed. Although talk of economic slowdowns often centres around the real estate bubble, a significant percentage of the millennial generation didn’t even have to invest in property to factor into the 21% increase in individual debt in Canada as of 2015. Diplomas, as it turns out, are the new mortgages, and the education bubble is the new real estate crisis.
So what’s an aspiring taxpayer to do? Doing without a post-secondary education isn’t exactly a solution for those who aspire to white collar professions where a higher education is still a must. In fact, with more and more diploma-holding people actively seeking work, nowadays a Bachelor degree is a basic standard to get into even an entry-level job.
To make student loans an asset and not a antagonist in disguise, it comes down to good financial planning. Certified Financial Planner Steve Santoro of Santoro Financial Group further has seen the good, the bad, and the ugly when it comes to the post-graduation aftermath of student loans: “Dentists I work with could potentially graduate with $250,000 of loans to pay off. Lawyers typically can have up to $100,000 in student debt. Unlike a depreciating asset or a luxury expense, you could view the tuition as an investment in yourself. However, $250,000 is not a small amount of money, and a higher income after your graduate is not guaranteed.”
Tackling tuition fees and the contemporary job market like a financial planning aficionado isn’t as complicated as it seems. It just means taking some important precautions. To help you get the education you need for the job you want without a financial burden over your head, here are Steve Santoro’s top 7 tips for paying off your student debt fast and efficiently:
Tip #1: Don’t take on as much debt – Some University students are more conscious of their spending over others. A student who pays $500/month in rent in a shared apartment over one who pays $1,800/month in a one-bedroom condo will save $62,400 over a four-year span. Just because you have access to $100,000 on a line of credit and $10,000 on a credit card does not mean you need to spend it.
Tip #2: Pay the person who is punching you the hardest – Often, students will have a few types of debt. They each charge different interest rates. It is recommended to pay the minimum payment to the lower interest debt and commit all your available savings to pay down the debt with the highest interest rate, regardless of the balance owing. Let’s assume you have $70,000 on your line of credit at 3%, $20,000 on your OSAP at 5%* and $3,000 on your VISA at 18%. If you have $4,000, you would commit $3,000 to the VISA and $1,000 to the OSAP.
Tip #3: Consolidate your debt – For example, let’s say you have a line of credit with a balance available of $100,000 and have borrowed $70,000 at 3%. You also have an OSAP of $20,000 at 5% and a VISA balance of $3,000 at 18%. What can you do? Take $23,000 from your line of credit and pay off your OSAP and VISA to zero. In the end, you will have $93,000 on your line of credit charging you 3% and zero OSAP and VISA balances. This effectively replaces a 5% and 18% interest charge with a lower 3% interest charge.
Tip #4: Attaching insurance to your loan is a no-no – As a general rule, I attach insurance to the person, not to the product. So, if you are offered insurance with your student loan or any loan for that matter, I suggest talking to a certified financial planner to get an insurance program that fits your needs now and as you advance through your life stages.
Tip#5: Have a payment plan that auto-debits your account – To efficiently pay off, debt make automatic payments. Automatic deducts from your bank account each month will ensure you never miss a payment and that you stay on schedule. If you can swing bi-monthly payments, you can watch your debt dwindle even faster.
Tip #6: Focusing on more than one goal at a time is OK – When you start making an income, a major goal is to pay off your student debt. Typically, the other major goal is to buy a home. To work towards both goals at the same time, contribute to your RRSP and use the tax savings to pay off your debt faster. The best way to achieve all of this is to work with a certified financial planner who looks at your current situation and future goals to build a realistic plan you can stick to.
Tip #7: Work With a Reward in Mind – At Vv, we believe achieving goals is a lot easier, and more fun, if you work with a reward in mind. It doesn’t have to be an extravagant trip, but by treating yourself to that designer bag or a meal at a renowned restaurant you always wanted to try, you’ll stay motivated. Just make sure that it is in your financial plan!
If you know some great ways on how you can be debt-free, let Vv Magazine know in the comments below or tweet us @ViewTheVibe.