Student debt: A hard lesson in higher education

School may be out for summer but the hard lessons are just starting for students trying to finance a post-secondary education in the fall.

Older folks can talk all they want about how tough it was back in the day but when you weigh the facts, it’s clear the odds are stacked against young people with moderate means, who are looking to move up the social ladder.

The reward

It may be a little tougher in the current economy but hitting the books after high school has its rewards.

According to Statistics Canada the unemployment rate for Canadians aged 18 to 25 is roughly double the overall jobless rate of just over 7 per cent.

A closer look at the numbers over the past decade reveals fewer and fewer of the few jobs out there are full-time with the generous benefit packages enjoyed by previous generations.

However, the alternative to a post-secondary education are far worse. In the 2011 census Stats Can reported 82 per cent of university graduates were employed, compared with 56 per cent who had no certificate, diploma or degree from college.

The cost

Statistics Canada estimates tuition for the average undergraduate college or university student in Canada is approaching $5,500.

That doesn’t include books, rent, transportation, food or other costs. A recent study by Knowledge First Financial estimates a 4-year program starting this September would cost a total of $81,800 including residence. If a residence is provided the total cost would be $48,900.

The risk

According to a recent Bank of Montreal poll 58 per cent of students surveyed said they expect to graduate with more than $20,000 in debt and 21 per cent expect to owe more than $40,000 when they enter the workforce.

Most lenders require loan repayments to begin within 12 months of graduation. A survey by the Canada Student loan program finds most students take about 10 years to pay their debt off.

The fixed interest rate is bank prime plus 5 per cent, which currently totals 8 per cent. The floating rate is bank prime plus 2.5 per cent, currently 5.5 per cent.

To put that in perspective, at 5.5 per cent monthly payments of $434 on a 10-year loan of $40,000 generates total interest of $12,100.

But interest rates are at record lows and have nowhere to go but up. If you compare today’s 3 per cent prime rate to the 15 per cent prime rate in 1990, the floating rate for a student loan would be 18 per cent.

In comparison, at 18 per cent a $40,000 loan would require monthly payments of $720 and generate $46,500 in interest over a ten-year period.

The plan

There is no easy solution to pay for an education other than saving as much as possible and finding a job between classes.

Parents can get a jump-start by contributing to a registered education savings plan (RESP) when a child is young. Ottawa will match 20 per cent of an annual RESP contribution up to $500 to a lifetime maximum of $7,200.

Investment gains are taxed in the hands of the student – which is usually zero.

A tax free savings account (TFSA) has the same tax-free growth advantages without the government contribution.

Young adults who find themselves still burdened with student debt should consider postponing registered retirement savings plan (RRSP) contributions until their higher-income years when bigger tax savings can be realized.

In the meantime, they should look for ways to pay off the balance with lower interest loans such as a secured line of credit on a home.

In many cases, homeowners can wrap their student loans into their mortgage if the rate is good.