How to pay off your student loans in a year
According to the National Student Loan Centre, it takes an average of nine years for Canadian students to pay off their student loans.
With recent media outlets indicating that Canadian student debt is topping $25,000, it’s becoming increasingly important for students and new graduates to implement debt repayment strategies.
Although these figures may seem slightly alarming, don’t fret! It’s possible to repay your student loans in a relatively short period of time (in my case, $17,000 in just one year).
Here are five simple, effective strategies to successfully start paying down your student debt.
Read the fine print
There are some common misconceptions surrounding the grace period of student loan repayment. For example, in Ontario, payments for the provincial portion of the loan are not required in the first six months post-graduation. However, interest on the federal portion (prime rate plus 2.5 per cent) of the loan begins from day one, causing a considerable amount of additional debt to add up. Consider starting repayment as soon as possible after graduation to get a head start on downsizing that debt.
Many students also don’t compare interest rates among credit lines and loans. On rare occasions, a student line of credit from a financial institution may boast a lower interest rate than the national student loan; one could be used to pay off the other, while maintaining the balance owed on the lower interest line.
Go through your banking and credit card statements, monthly bills, and receipts to create a realistic budget that will set you on the path to financial freedom. To create a budget that you will actually stick to, tally up all of your monthly expenditures to get your spending baseline.
When I first attempted this exercise, I realized I was spending more on Starbucks coffees and Saturday night outings than I was on food in my fridge. With adjustments to my spending habits, I was able to pay down additional debt each month instead of unnecessary spending.
Additional ways to save big:
- Explore your bank’s plans to avoid service charges and annual fees; avoid ATMs outside of your bank
- Compare home and car insurance rates for the best price
- Shop around for the most affordable cable, mobile, and internet services
- Pack lunches, make coffee at home, and meal plan prior to grocery shopping
- Avoid convenience purchases at gas stations or a drive-through
Now that you are aware of your spending habits, make a list detailing your monthly income compared to your necessary living expenses. Include rent, utilities, cable, internet, cellphone, transportation, groceries, toiletries, gifts, a reasonable entertainment allotment, and most importantly, debt repayment. Making debt repayment a priority in your budget is an effective way to stay focused on your goal and to ensure money is not spent on non-necessity items.
Pay yourself first
As suggested by financial guru Gail Vaz Oxlade, another way to ensure debt repayment is a priority in your budget is to pay yourself first. Many new grads don’t adjust their monthly loan payment from the minimum rate, even after they have secured employment. This mistake allows more interest than necessary to accrue over time, ultimately increasing the debt and extending the duration of your payments.
With each paycheque, make payments to yourself that are applied directly to your line of credit or student loan. Once I found full-time employment, I was able to increase my minimum monthly payment by 500 per cent.
Another strategy is to use lump sum reimbursements, such as your income tax refund, directly towards repayment. My first income tax return after graduation significantly helped lower my debt, as I was able to apply all of my remaining tuition deductions and textbook credits for that year.
Cash or credit
There are many student- and new grad-friendly credit cards, which offer reasonable rewards with no annual fees. The American Express (five per cent) or Tangerine (two per cent) cash-back rewards cards are a great option to obtain a percentage back on your purchases. For example, if you spend $1,000 per month on your credit card at two per cent cash back, that’s $240 per year that you can apply directly to your student loan.
However, this is counterproductive if you cannot pay your credit card balance at the end of the month, allowing interest rates averaging over 18 per cent to accumulate.
In this case, the old piggy bank strategy works too. Having cash-in-hand can sometimes feel more tangible than swiping plastic, helping to ward off mindless spending. Put a weekly stipend of cash into separate jars or envelopes for categories like food, transportation, and toiletries; having a set amount of money to work with may help to ensure you stick to your budgetary goals each week.
Naturally, you will need to make certain sacrifices to successfully budget and pay off your student debt; compromise on what you can and can’t live without to keep your goals realistic and attainable. With these strategies (and some determination and dedication), you will surely chip away at your student debt and find yourself closer to financial freedom.
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