Student debt repayment: A case study

It’s not uncommon for recent graduates to enter the working world juggling debt repayments on multiple student loans. Here’s a strategy that works.



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It’s not uncommon for recent graduates to enter the working world juggling debt repayments on multiple student loans.

Iman (not her real name), 26, works in the Greater Toronto Area as a part-time communications professional. Her graduate studies left her saddled with $20,175 in Ontario Student Assistance Program (OSAP) debt and a roughly $8,500 student line of credit from her bank.

While OSAP has temporarily waived Iman’s 5.5% interest rate because she’s only working 24 hours per week, her line of credit carries a 4% interest rate.

Beyond minimum payments, Iman’s strategy is to pay off her line of credit in full before shifting her attention to the OSAP loan. She hopes to have her bank loan paid off by September at which point she plans to open a high-interest savings account until she has the full OSAP balance saved up and can pay it off in one shot.

Iman is following a tried-and-true debt repayment model.

“When looking at debt, the majority of funds should be applied to the debt with the highest interest rate, while paying the minimums on the others,” said Brenda Hiscock, a financial planner at Guilfoyle Financial in Toronto and a member of Advocis, the Financial Advisors Association of Canada.

“Once the first debt has been paid off, the funds that were being applied to that debt now go to the debt with the second highest interest rate, and so on.”

Iman’s may be a solid plan but it’s not fool-proof.

“The one risk that she may face is if that 4% (on her student line of credit) is a variable rate,” Hiscock said.

“We’re in a rising interest rate environment and that will eventually be bigger than the 5.5% OSAP loan.”

Iman will also have to stay on top of the OSAP repayment assistance program by reapplying every six months and there’s no guarantee she’ll qualify every time.

If she doesn’t, she’ll have to switch gears and focus on paying down her OSAP loan instead since it costs more to carry.

Iman’s lump sum payment strategy for the OSAP loan only makes sense providing she continues to receive interest forgiveness.

She shouldn’t be sinking any excess money in OSAP until the time comes, Hiscock said.

“I’d be throwing money into a high-interest account and the day that the forgiveness ends, is the day I put that whole lump sum of money toward OSAP.”

Even with a more than $28,500 debt burden, the future looks bright for Iman. She looks forward to the day when she can start growing her savings for travel and eventually parenthood.

“I get the sense she’s a good money manager,” Hiscock said.

Iman’s diligence means she’s not having cash-flow problems so debt consolidation isn’t necessary.

Not everyone is so lucky. Roughly one in 10 Canadians is in a vulnerable financial position–meaning that the cost of servicing their debt consumes more than 40% of their income. That’s when most people start to have issues in making their debt service payments.

Hiscock’s rules of thumb for indebted Canadians:

Have a 3-year plan. If debt repayment seems impossible within three years, then consider a consolidation loan, trimming your budget, or boosting your income.  Sometimes people have to take a second job in order to get their finances in order in the short term. Exceptions to this are student loans which can go up to 5-7 years, and of course a mortgage.

Follow the 40% rule. No more than 40% of income should be used to pay household expenses and debt combined (ie. rent/mortgage, property taxes, heat/hydro, loans etc.) If you’re spending more than 40%, it’s time to consider downsizing. Track your expenses by downloading Hiscock’s monthly budget spreadsheet.

Watch your credit cards. If you have multiple credit cards with balances, and they are not reducing over time, consolidate the balances, get rid of all cards except one and reduce the credit limit on that card.

Make saving a priority. Make sure that funds are being put away for savings, regardless of your financial situation.  Even when dealing with debt, 5% of income should go into savings, working towards 10% in the future.

10 comments on “Student debt repayment: A case study

  1. As you rightly point out, when someone manages their money well and has a realistic plan, saving up to pay off debt in one lump sum could work. However, for so many people, once they see they've got some money saved, temptation spending kicks in and they waiver from their plan…. Looking beyond the numbers, often a balanced approach works out better in the long run (as we can be our money's worst enemy). Paying debt off incrementally, setting some money aside in savings while also managing current expenses, allows someone to see progress and helps protect them from factors beyond their control.


    • Hi Julie. Thank you for your comment. Iman’s main goal is to pay out her OSAP loan before it begins to cost her money, and she has excellent cash flow, so in this instance, a quick payout can make sense. Liquidity certainly was considered when looking at this strategy, and it can be found in the high interest savings account. Since Iman is saving all funds for OSAP in a high interest savings account wihile on interest forgiveness, if life does happen along the way, she can access those funds anytime, and just extend her payment plan out accordingly.


  2. Very helpful article, but the link to Hiscock’s monthly budget spreadsheet does not work.


    • Hi Sarah,

      Please try again. We've uploaded a new version to be compatible with Excel versions 1997-2003.


      • Thank you!


  3. Does interest accumulate on loans with low repayment amounts? Look up "Tertiary Tuition fees in Australia (wiki)."
    There is no interest that accrues, although amounts are adjusted to reflect inflation. Repayment is based on income (ability to pay). Australia's model for covering costs does not provide the opportunity for private gain and political chicanery that the US model does. Australia also does not seem to have the contention for admission based on social factors that the USA does.


  4. This article is great because it can help steer a newly graduated person to avoid getting into debt issues later, it also offers a great plan to getting their finances in order if they already have debt. One thing I must comment on is the fact that 40% rule to cover all those expenses is unrealistic in the average person’s budget. Where is the other 60% being allocated towards if they have debt?


    • I am wondering about the 40% myself…I am going to guess it must be situation to situation. I just did a calculation on my expenses, and I am at more than 40% on mortgage and debt combined but the student debt will be gone in two months time. I would certainly not consider downsizing though because I knew ahead of time there would be a rough few months ahead where I needed to manage my finances humbly. I don’t NEED to spend the other 60% on non debt. Debt isn’t something to be proud off, I owuld hope everyone’s goal is to get rid of it not ride with it on the side for as long as possible.


  5. They provide reliable information and educational planning for the student's career. They also give advice to students and counsel them about the best course that would be optimally suited to their talents and inclination.


  6. I have a question about putting money toward savings. Recently a friend of mine attended a financial information session at school. Although they have $40,000 in debt, they were told to still put money away toward savings. Should the student try to pay the debt off with the money they would normally put toward a savings account? The reason I say this is that while it’s good to start saving early, we know that the cost of living TODAY is very different from when we will be 25+ years from now when I’d want that money (assuming you’re puttin gmoney into a retirement plan). So shouldn’t we be putting today’s valued $ into today’s debt and interest rate? My $100 toward my debt today will go a lot further than $100 in 25 years (forgetting interest rates and all that for a moment).


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