Graduating: Plan for student debt

With a daughter who graduated from university last year and landed a job in mass media arts, Robert Stammers is one proud father. He’s also quick to acknowledge that she’ll be paying for her education for years to come.

“She has a job, and it’s wonderful,” says Stammers, director of investor education at the nonprofit CFA Institute. “But we have been talking about student loans for a while; her debt is a fairly hefty amount. You need to have a plan to pay them down, because they can become an anchor. You don’t want to be paying it off for the next 30 years if you don’t have to.”

With a new batch of university grads about to enter the working world — whether it’s in their chosen field or as a barista — student debt has never been a more pressing problem.

Federal student debt has now surpassed $15 billion, rising at a rate of nearly $1 million per day, according to the Canadian Federation of Students. That figure does not include the credit card debt, lines of credit and provincial student loans owed by Canadians, which is estimated to be between $5 - $8 billion.

The number of young people with debt loads of $25,000 or more when they leave university or college is on the rise, sitting at 27 per cent in 2011, up from 17 per cent in 1995.

“It’s a very tough situation. The cost of education is going up faster than people’s ability to pay for it,” Stammers says. “Students today are starting out life in the red.”

Student loan debt plan

As Stammers has conveyed to his daughter, figuring out exactly how to pay off that debt is crucial.

“The biggest pitfall facing people with student loans is not having a plan on how to pay them down,” Stammers says.

The first step is to prioritize debts, paying down those high-interest credit cards first.

“Get rid of consumer debt,” Stammers says. “Get out of high [interest] debt first. There’s no place for that in the long term. And try not to use consumer debt to create more reasons to consume. You can’t let that get out of control.”

At the same time as determining which debt to focus on first, people also need to plan for other financial needs, Stammers says: saving for a down payment on a home, for instance, and putting money aside regularly for an emergency fund.

The worst thing people with student debt can do is ignore it. Doing so is bad enough when it comes to credit cards.

“You cannot get rid of student loan debt via bankruptcy in the U.S. or Canada,” Stammers says. “If you don’t pay it, the interest accrues and the debt gets bigger and bigger, but it’s not going anywhere. It will not go away.”

About 87 per cent of all federal student loans are repaid. What happens when they’re not? Taxpayers foot the bill.

This year, the federal government is writing off $231 million in unpaid student loans from more than 44,000 cases. That means taxpayers need to cover more than half a billion in uncollected student debt over the past few years.

More than 98 per cent of the loans written off by the government are dropped because of the expiry of a six-year limitation period between when the borrower last acknowledged a loan and any legal activity to collect that debt.

To recoup debts before the government is legally barred from doing so, the Canada Revenue Agency will send monthly statements and collection letters, take back income-tax refunds, and refer accounts to the Attorney General of Canada, which can garnish wages or even seize assets.

“You can’t be naïve about your debts,” Stammers says. “It’s even more important that parents discuss financial management with their children. Children today are going to need it earlier than we ever did.”