Are you planning to finance your education with Student Loans?
If you are, my hope here is to arm you with some important information you should know before you take on Student Loans.
This is information not readily available in Government Pamphlets or on the CanLearn website but discovered through my own experience.
This article relates most to Canadians but in some cases may also apply to Americans who are planning to finance their education by Student Loans.
First, let me assure you I am definitely pro-education so my point here is not to discourage you from following your educational dream but to make sure you know the facts before financing your education. Obtaining Student Loans may be the only alternative to reaching your educational goals but there are things you must consider before taking on that financial burden. There is a reason why there is a very high rate of default on student loan repayments. To avoid finding yourself in a difficult situation, preparation and knowledge are critical to your success and long-term aspirations.
It is very difficult to find any information on Student Loans that will give you the knowledge you need to make informed decisions. I know this from experience. When I decided to return to university back in 2001, I was thrilled. Getting the loan wasn’t the problem but obtaining the crucial information I needed to know for the “before and after” obtaining my education was just not readily available. The government website was so vague that it was of no real use in any kind of preparation.
It wasn’t until my position at work was filled and I was financially and emotionally committed to going back to school that I found out the crucial factors I needed to know.
Student Loans can either make or break your educational goals. You may not be able to continue your studies because you may not be able to live on the loans alone or you may have extreme difficulties in repaying your loans.
My hope is to provide you with some tips that you can use to prepare yourself before taking the leap by knowing what to expect during and after your studies. If you find you would like to ask more questions or contribute information, don’t forget to add your comments.
Be Financial Prepared:
Government pamphlets and the CanLearn website tell you that you will need to save a percentage of your income over the four months prior to attending school. What they don’t specify is just How Much or What Percentage. I don’t know why that information isn’t readily provided but I was unable to find it.
I was starting classes in September and it was already mid-July before I received my Student Loan acceptance letter. It was only then I found out just how much they expected me to save from my income over those four months.
My monthly take-home pay was approximately $1700. My total take-home pay for the four-month period was $6800. They informed me I needed to save $3400 over that period. That amounted to 50% of my take-home income; leaving me with about $850 to live on each month prior to attending school. It didn’t matter that my living expenses were taking a great deal of my take-home pay at the time. I was supposed to save that amount no matter what. I started my first year already short by $3400!
Consider Your Opportunity Costs:
What do I mean by opportunity costs?
Opportunity costs are what you will be giving up by going back to school. It is a business term used for measuring the value of some new venture over the old.
I had already given notice to move from my apartment for the beginning of August of that year. The only way I could manage as an older student was to move into a room-and-board situation so I ended up selling 90 % of my furniture and other belongings. I felt it was a small sacrifice for what I would be gaining.
What I hadn’t taken into consideration was the total cost of what I was giving up. Let me explain this further. Aside from selling most of my belonging that would cost me several thousands of dollars to replace, I was also losing a monthly income. If my monthly gross wage was $2200 per month, the total lose of wages over the four years while I attended university would be $105,600. Staggering isn’t it? Now add my student loan cost before interest charges and that is approximately another $35,000. So not even counting the cost of replacing my belongings or the interest on the loan, the actual cost of my education is in excess of $135,600. Ouch!
How many years will it take YOU to recoup your opportunity costs given the wages you’ll earn with your additional education?
Considering the total cost of my education of $135,600 and the difference in my wages since furthering my schooling, it will take me about 18 years to recoup my costs again not counting the interest I will be paying on the loan or the replacement of my belongings.
Consider Your After-Study Income Potential:
All too many students are unable to pay back their student loans because they are either unable to find work in their field of study or end up getting jobs in their field but with insufficient incomes.
Before you enroll in your program of study, make sure you do your research. Getting an education in a field of study that interests you is great but if you aren’t going to make enough money afterwards to pay your bills including your student loans, then what’s the point. After all, most of us want to further our education so we can make a higher income and have a better standard of living.
Check to make sure you will be able to find a job in your field after graduation. If you don’t want to move from your area, make appointments around town with potential employers and go with your list of questions such as: What is the potential of finding employment in the field? What is the starting wage? How often and at what percentage of increase in raise can you expect each year?
You can tell a prospective employer you are considering their field of study but want to ensure you are adequately prepared. As a former employer myself, I would not hesitate to help a student make an informed decision.
Look at Other Alternatives:
You may be able to reduce the cost of your education by looking at some other alternatives.
For instance, do you need a degree in your field of study or would a diploma suffice?
I knew a young woman who at first was studying for her Art Degree. She was very artistic and so naturally that was the educational route she wanted to follow. However, after two years, she realized she couldn’t afford to continue pursuing her degree so instead decided on a two year Graphic Arts Diploma. Diploma courses are less expensive than degree courses, so she was able to reduce the cost of her education, complete her educational goal, and obtain work in her field.
Even better still, try to save as much money as possible before furthering your education. The more money you have to finance your education and not need in Student Loans the better for you and your success. It could mean lower Student Loans, or eliminating your need to work part-time. I’ve known students who alternate working one year and taking full-time courses the next.
Another possibility is to take your courses part-time or through correspondence if you are disciplined enough to do so. You won’t need to take out Student Loans nor will you lose your income or current standard of living while you pursue your educational goal. There will be very little adjustment required except for making time for your studies and a little extra cost each month for your courses. Of course, it will take you much longer to reach your goal although it will be at a lower cost.
If you are currently receiving Employment Insurance, Social Assistance, or Social Disability benefits and are unable to find employment, check with these programs to see if they will subsidize your education.
Earlier, I had mentioned about interviewing prospective employers. You never know, one of those prospective employers may be able to offer you a sweet opportunity such as hiring you as a trainee, and/or subsidizing your education, or hiring you part-time while you are in school. Never underestimate the possibilities.
Student Loans and Living Expenses:
The Federal and Provincial governments have a set amount they will loan you per semester or term depending on whether you are single, single with children, married, and so on. This amount will have to cover your tuition, textbooks, and living expenses. When it comes down to it, as a single person the amount you will have to live on after you pay for your tuition and books will be only a little better than what a person receives on social assistance or social disability. I’m talking approximately $800 a month. Depending on your needs, this will by no means solely support you while you purse your educational goals. This amount is also dependent where you live in Canada as tuition varies across the country.
Is it any wonder you see so many students sharing accommodations with as many as three or more students. For some, this may work fine but for others this kind of living set-up may not be appropriate or ideal for studying. It is not unusual for many students to have to visit food banks to reduce their living costs.
Working While Pursuing Your Education:
If Student Loans won’t be sufficient to cover all your living expenses while you pursue your studies, you may have to consider working part-time.
This is a minor detail for some but for others there are serious considerations to working during this period. Each student’s study needs are different. Some require less time to studying than others. The more time one needs, the less time available for working.
If you have health issues, this may also limit your ability to work while studying.
You may have difficulty finding employment since you will be competing with many other students also looking for work in your area. Or it may be difficult to find employment that will offer flexible hours that will work with your study and/or health requirements.
Finding a flexible position before you begin your studies will be much to your advantage.
There is one other issue when it comes to working. The government does not indicate just how much you can earn from working before they start deducting your income from your future loans.
Repaying Your Loans:
Both the Federal and Provincial governments charge prime plus two percent compounded daily on Student Loans. This doesn’t sound like much but it can really add up. Before taking on a Student Loan, determine how much in loans you will need each year and for how many years. Determine what the total will be for you to complete your education and then find out what the governments will want for monthly payments. The Financial Aid office of your educational institution may be able to help you with this.
Remember, you will have two loans, Federal, and Provincial. They do not combine the loan payments together so you will be making two separate payments each month six months after you complete your last month of studies.
Applying for Grants, Scholarships, and Bursaries:
You must take the time to apply for every grant or bursary for which you qualify. Yes, after a certain amount, you may have to pay some income tax at the end of the year. The Federal and Provincial programs may deduct the amount of certain grants and bursaries from your student loan payout. Sure, the grant or bursary will reduce the total amount of loan you will have to repay but they will be of no assistance during your studies when you most need it. The Millennium Bursary Fund is one example. The Federal Government issues the bursary to the Provincial Government who then deducts it from your loan payout. Much to many students’ dismay, they never actually receive the money in hand.
Paying Back Your Students Loans Quickly:
The first time I had taken out Student Loans many years ago, I had borrowed a principal of $4,000. I paid approximately $75 per month for three years. Much to my horror, I found out after the three years that I still owed $3,100 and at least six more years of monthly payments remaining. Back then, I was looking to purchase a car so I consolidated the balance of the student loan in with my car loan. I was able to shave off several years of paying monthly on the student loan not to mention horrendous interest. I paid off my combined loan in four years.
If it is at all possible, pay off your student loan as quickly as you can. If you have good credit, it may be to your advantage to take out a bank loan. Both the principal and interest will be set so you will not be paying that prime plus two percent compounded daily. The “compounded daily” interest is a financial killer.
If that isn’t possible, make a higher payment each month. What you will save in interest charges will be well worth it.
Defaulting on Student Loans:
If you end up in the unfortunate situation of not being able to repay your Student Loans, neither the Federal or Provincial governments will have pity on you. If you are unable to make your payments but you work, they will take as much as 30% of your gross wage. After your payroll deductions that could mean about half of your take-home income. Not a position you want to be in is it?
If you end up in this situation, you will not be able to claim bankruptcy on your loans for seven years after you stopped taking classes. This requirement dropped from 10 years effective July 2008.
Your best bet is to see if they will be willing to work with you.
My Final Words:
My hope is that this information will assist you in your educational journey by helping you avoid the pitfalls that so many students including myself have encountered due to taking on student loans unprepared. I encourage you to add your comments and provide any information you feel would be valuable to other students.
Please send this blog site address to any and all your friends who are considering or have already taken out Student Loans or have children who may be looking at furthering their education.
I wish you all the best and much success.
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