A Graduate’s Guide to Student Loans
I just received a letter informing me that I paid off one of my student loans’ accounts. The paid-off amount amounted to 1/3 of my total student loans debt. Having seen that letter, I knew the Gods of personal finance were smiling down on me. I thought since I figured a few things out, I might as well share it with the broke-ass recent graduates who don’t know what is going on. Maybe a student will benefit from it and I can get some brownie points out of this deal.
Here is a reminder about student loans:
It cost money to borrow money.
Fun fact of the day: The average Canadian student graduates with $26,000 in student debt. If she/he wants to pay that amount in a 10-year period, the amount of total interest paid would be $7,064.48. That’s over 27% of the total debt. Now if they have a larger amount of student loans, they are paying a larger amount of interest. Remember you always, always pay up the interest first before you pay the principle. So the more you borrow, the more it costs you.
This is the most essential concept about debt one must understand. The best thing about interest is to avoid it. In order to know how to avoid it, you have to know how it accumulates. Interest starts to accrue in 3 different scenarios:
- When you forget to let the National Student Loans Service Centre (NSLSC) or your provincial loans office that you’re back in school, which you should do every semester.
- When you are in your 6-month grace period immediately after graduation.
- When you’re in the repayment period.
So in scenario 1, always submit your request form for the interest-free period so that NSLSC receives your proof of enrollment from your school. You can do this as soon as you are registered in your next semester’s courses.
Scenario 2 and 3 are rather subjective to different circumstances which we explore below.
Get rid of the principle. Get rid of it fast.
If you have savings that won’t go anywhere for a while, you might as well use it to pay off your student loans and get rid of the cancerous interest that accumulates constantly. Not only this will help you with other credit applications but it gives you the opportunity to practice the idea of debt-free living early-on before having debt becomes your normality. With your student loans paid off, you’d benefit from eligibility for higher credit card limits, car loans, mortgage, and a healthy credit score. Remember, you don’t need to be a perfectionist when it comes to repayments. You can make any amount of lump sum payments during any month. All it takes is filling out a one-time payment application and a fax machine or a stamp. You can still find those in any printing shop or at an office.
“But I don’t have the money for it or I have other financial plans/would rather pay it later.” That is totally okay. In fact, that’s the sole reason NSLSC offers repayment assistance plan to cover the interest that accrues on your loan, which you’d need to re-apply for every 6 months. In the meantime, you can look for ways to save up for lump-sum payments and create an income for yourself. That way you are actually implementing the idea of costless borrowing where the Government pays off the cost.
Do your research.
The idea of costless borrowing is more or less fictional in this day and age but because you can borrow money for education, the government gives you easy ways out of it. Make sure to do your homework and know what exactly the interest rates are in your contract. I can personally attest that what I thought was in the contract, altered to be different than I was getting charged. How? I still don’t fully understand it myself but all it took was a phone call to NSLSC and I got the facts straightened out.
I have no idea why no one talks about Student Loans before we started school. My immigrant parents were clueless. My friends and classmates were not comfortable talking about it. Even I who read the terms of the contract word by word still found the whole thing very confusing. This does not mean you will be clueless. I encourage you to spend the time to read your contract, learn about the interest rates and do what I didn’t do from the beginning: call the NSLSC and ask questions and for resources. Happy financial planning!
Originally published at amidsedghi.com on October 1, 2018.