Tackle high-interest debt first

Most Canadians graduating with student loan debt will have more than one type of loan. For example, you may have government student loans, and also a student line of credit at a bank. When you start paying off your student loans, you’ll need to choose which debts to prioritize first. Generally speaking, you should tackle the highest interest debt first, because that debt is costing you the most.

For example, let’s imagine that you graduate with government student loans totalling $25,000, subject to the federal student loan interest rate of prime plus 5% (Canada’s current prime rate is 3.95%, for a total interest rate of 8.95%). In this scenario, you also have an $8,000 student line of credit at 5% interest. Between these two debts, you should tackle the federal student loans first, because they have a higher interest rate.

There are two situations where you may want to add some extra consideration to the debt prioritization process. The first is if one of your debts has a variable interest rate. Variable interest rates can rise and fall with your lender’s prime rate, so you’ll need to monitor that rate and perhaps switch your focus if it becomes the more expensive interest rate. The second situation is if you have a second loan at a lower interest rate, but also a much lower balance. In this case, tackling the loan with the lower interest rate first may be an easy way to eliminate a debt before you tackle your higher interest debt.

For example, if you have a $25,000 student loan at the interest rate above, and a $1,000 loan from your parents at 0% interest, you may want to tackle the parental loan first.

In my case, the $42,000 student loan wasn’t my only debt. I also had a $12,000 car loan at 2.99%. My student loan had the higher interest rate at 5.5%, and it also had a variable interest rate, which could have gone up if the Bank of Canada had raised the prime rate, so I prioritized paying that loan off first.

Live like a student, earn like an adult

Getting started in life after graduation is expensive. If you move to a new city or apartment, you’ll need to pay start-up costs like damage deposits and the first month’s rent. If your first job requires a vehicle to commute, purchasing a car will also add a monthly payment and insurance costs to your bills. With all of this adulting going on, it can be tempting to succumb to social pressures and overspend, but if you want to pay off your loans quickly, it’s important to resist that pressure.

Instead, opt to continue living frugally for a while and reap the financial results. In my case, I rented a tiny, 400 square foot cottage with my husband for a year and a half. It was cramped and rather cold in the winter time, but the low rent allowed me to divert thousands towards my Canada student loan repayment.

While you should continue living like a student to pay off your loans faster, once you graduate, it’s time to earn like an adult. Land the highest paying job you can and freelance on the side to sharpen your skills and bring in extra cash.

When I graduated, my first job out of university didn’t pay much, so I spent my evenings and weekends freelance writing to earn extra cash. The money went toward paying off my student loans, and the extra income gave me an additional safety net in case of job loss.

If you’re really in a jam and your bills are piling up, make sure to research all your loan options before borrowing money from the first lender you can find. A lack of research could be detrimental to your credit score.

Apply for student loan forgiveness

Some student loan providers offer loan forgiveness. For example, in 2013 the government of Canada started offering Canada student loan forgiveness for family physicians and nurses who commit to working in rural areas. Under this program, up to $40,000 in student loans may be forgiven for family physicians and up to $20,000 for nurses. This federal program is also available as student loan forgiveness in Ontario. Another example is the Saskatchewan Graduate Retention Rebate, which provides Saskatchewan residents with student loans up to $20,000 in income tax credits.

In my case, I was able to apply for the New Brunswick Timely Completion Benefit, which forgives your provincial student loans down to a minimum balance of $26,000 (this limit has since been raised to $32,000). By simply Googling and filling out some forms, I was able to reduce my student loan from $16,000. This simple step was hugely instrumental in my ability to pay off my school debt in less than two years.

Consider repayment assistance

Finally, if you are struggling to pay back your student loans, most provincial student loans have repayment assistance programs (RAPs) designed to help you manage the financial burden until your circumstances improve. For example, Ontario’s RAP allows you to make an affordable monthly payment based on how much you earn, rather than based on the standardized ten-year repayment period. If your affordable monthly payment is not enough to pay the interest on your loans, the government will pay it for you. Most RAPs require income verification and regular re-application, and qualification is reserved for those with a lower income, so these avenues are reserved for those who are genuinely struggling. Aside from repayment assistance programs, some students also consider student debt consolidation in order to make it simpler to repay all their debts.

Don't take your debt lightly

The average Canadian student graduates with $25,000 in student loan debt and the burden this can place on your mental health shouldn’t be underestimated. For Ontario students, this burden is about to get even heavier, and Ontario student loan forgiveness is rare, which is why it’s important to be proactive to do everything you can to pay off your student loans quickly. By prioritizing your debts, living frugally, maximizing your income, and researching loan forgiveness, you’ll put yourself on the fast track to debt freedom.

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Jordann Brown is a freelance personal finance writer whose areas of expertise include debt management, homeownership and budgeting. She is based in Halifax and has written for publications including The Globe and Mail, Toronto Star, and CBC.


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