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Student debt: How to manage when starting your career

Gail Johnson
Study: College loan debt tops credit debt, auto loan debt

Student loans seem inevitable these days, and so does the resulting mountain of debt. Money borrowed to study everything from film-making to psychology can add up to a big headache post-grad. But it doesn't have to.

"Somebody who goes to medical school could have $100,000 in student loans if not more," notes Vancouver certified financial planner Biljana Manojlovic. "When you're in your starting-out phase, trying to establish your career or start a family, as well as pay off credit-card debt, adding student-loan payments can drain the paycheque.

"It's important not to get discouraged," she adds. "Paying it off is doable. If you're working, payments can increase over time."

According to the BMO Financial Group's 2012 Student Survey, nearly 60 per cent of post-secondary students will expect to graduate with about $20,000 in debt, while another 21 per cent expect to owe more than $40,000.

The cost of post-secondary education, including tuition, books and housing, is about $14,500 a year, according to Statistics Canada, or nearly $60,000 for a four-year program.

Most students take nearly 10 years to pay off their loans, with some taking the maximum 14.5 years, according to the Canada Student Loan Program.

So once you've landed that dream job you worked so hard to qualify for, consider a few ways to deal with your student debt:

Prioritize your debt payments

"Pay off credit card debt, which typically has the highest interest rate, first," Manojlovic suggests. "When it comes to ranking of the debt, usually student loan debt has lower interest rates. That's not to minimize student-loan debt, but credit-card debit is the number one enemy."

For example: Nova Scotia provincial student loan borrowers can select either a floating annual interest rate of prime plus 0.5 per cent or a fixed annual interest rate of prime plus 3.0 per cent.  Even if you were smart enough to apply for a low-rate credit card, the interest rates on consumer debt are substantially higher.  The RBC Visa Classic Low Rate credit card charges 11.9 per cent interest and comes with an annual fee of $20.

Avoid avoiding your payments

"If you don't make your payments, it will affect how much you can borrow in the future, say for when you want to buy a home," Manojlovic says.

If you're having trouble making monthly payments on your federal student loan, the Government of Canada has a program enabling you to have your financial situation reviewed. It takes into account factors such as income and family size to determine what you can afford to pay on a monthly basis.

Under the plan, payments will not exceed 20 per cent of a borrower's family income. In some cases, people may not have to make any loan payments until their income increases.

Check out the Government of Canada's National Student Loan Repayment Assistance Plan.

Look for provincial government plans

Most provincial governments have programs to help grads manage their loan payments, such as their own repayment assistance plans as well as interest relief and revision of repayment terms.

Consolidate your debts

One way to manage cash flow and reduce debt is to consolidate all of your various loans, credit lines, and credit-card balances into a single loan with a set repayment schedule. A key benefit of consolidating debt is getting a far lower interest rate than what credit-card companies or other creditors are charging you. You save money on interest and can pay off debts faster.

Consider a consumer proposal

A consumer proposal involves negotiating a repayment plan with your creditors. Monthly payments are made through a trustee or administrator who distributes funds to each of the creditors.

Look at filing for bankruptcy

It's an anxiety-provoking term to be sure, but according to BDO Canada, a firm of bankruptcy trustees, filing for bankruptcy can be a solution if you owe more money than you make, are unable to make regular payments on credit cards and loans, can't pay other monthly bills and have had your wages garnished.

If considering bankruptcy, it's important to know the rules. The student debt incurred must be at least seven years old in order to be discharged, but borrowers may be eligible at the 5-year mark if they can prove repaying the loan will result in "undue hardship."

For more information, visit the Office of the Superintendent of Bankruptcy in Canada website.