If you’ve taken on debt to get your diploma, now what? Here’s how to be financially savvy about repaying your student loans.
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Pursuing post-secondary education can help you land your dream job. But obtaining a degree or certificate can comes at a cost, in the form of student loans. In fact, the average Canadian takes 10 years to pay off student debt.
According to Statistics Canada, Canadian students enrolled in an undergraduate program shelled out on average $6,693 in tuition costs for the 2021/2022 academic year. If you live away from home, you might need loans to cover housing costs, too. Over a typical four-year program, that can mean shouldering tens of thousands of dollars of debt.
So, how can you pay off your student loan debt? We break down the types of student loans, repayment strategies, and how you can balance this obligation with other priorities.
Here are several key factors to consider when making a plan to pay off your student debt.
You may have one type of student loan or a mix of a few. Here’s a breakdown of the various options available to Canadian students.
Figure out how much you owe to each separate source. Once you’ve gathered your sources, now you’re ready for step two.
If you have a mix of loans, the interest rates for each will vary. In response to the financial challenges of the pandemic, the Government of Canada announced that it has suspended the accumulation of interest on Canada Student Loans and Canada Apprentice Loans until March 31, 2023. However, you will still need to make monthly payments.
For Canada Student Loans, the default is set to a floating interest rate, which is equal to the prime rate (currently at 6.7%). If you wish, you can switch to a fixed interest rate, which is equal to the prime rate, plus 2%. Know though, if you make this change, you cannot go back to a floating rate. You can make this change by logging into your National Student Loans Services Canada (NSLSC) account.
The interest rates can also vary for provincial or territorial student loans. Reach out to your student aid office to find out more information on how much interest you may owe.
If you use a student line of credit, one of the surprising benefits is that the interest rates tend to be lower compared to government student loans. Currently, each financial institution is charging their own variable prime rate, so it will vary based on your lender.
In my opinion, it’s wise to pay down your Canada Student Loan during the non-repayment period, which is the first six months after finishing up your studies. Although you won’t be charged interest, it does accrue immediately after you complete your studies. This will help to reduce the interest payable on the loan. For a provincial student loan, each province and territory has its own set of rules. You can find more details on the Government of Canada website.
You can determine what the monthly payments will be using the Loan Repayment Estimator tool. By entering the total amount of your student loan debt, selecting the type of interest (fixed or floating), along with the number of months you estimate you will need to pay off the loan, the calculator gives you the amounts for monthly payments and payable interest.
For example, say you have $25,000 in student loan debt when you graduate, your loan has a 3.2% interest rate and a 10-year repayment period. With option one, you wait to begin making payments six months after finishing school. With option two, on the other hand, if you start making your repayments immediately after you finish school.
With option one, you will pay a $4,246.01 in total interest. With option two, you will pay $3,793.50, reducing the interest amount $452.51. See the chart below for a further breakdown.
For an even smarter way, you could make larger lump sum payments, and this will further reduce your principal amount and thereby shrink your total interest payments.
| Loan repayment estimator | Option 1 | Option 2 |
| Total loan amount | $25,000 | $25,000 |
| Fixed or floating interest rate | Floating | Floating |
| Interest rate | 3.2% | 3.2% |
| Repayment start date | 6 months after finishing school | Immediately after finishing school |
| Number of months to repay loan | 120 | 120 |
| Monthly payment amount | $243.72 | $239.95 |
| Total interest payable over the life of the loan | $4,246.01 | $3,793.50 |
| Total amount payable | $29,246.01 | $28,793.50 |
Considering, in Canada, the average student loan debt is $28,000 for a Bachelor’s degree and $15,300 for college graduates, it may feel like a lot of money, especially if you are looking to land your first full-time job. Coming up with a repayment plan to match your comfort level and income is key.
Did you know that you don’t have to wait until graduation to start paying off your student loans? You can make payments while you are still a student. Payments during this time go straight towards the principal of your loan, too. So, if your program has a paid internship or co-op program, or if you have a summer job, you can set aside some of your earnings to make lump-sum payments to help reduce your loan and shrink the interest payments.
If you have the capacity, increasing the amount of your monthly payments will help you get out of debt faster. What’s more, the amount you pay above the minimum payment will go toward paying off the principal of the loan. Even better, this will help to reduce your balance and thus reduce the amount of interest you will have to pay.
If you are looking for ways to reduce your expenses, you may want to consider finding a roommate or living at home. It may not be how you pictured starting your new journey as a young adult, but it will help you to cut costs on household expenses and give you room to make your loan payments.
Having graduated from Toronto Metropolitan University (formerly Ryerson University), I had my fair share of Ontario Student Assistance Program (OSAP) student loans. I was able to pay off my loans within six months of graduation by earning scholarships and working various part-time jobs. I applied for, and received, 10 scholarships during my four-year studies, totalling more than $10,000. This helped to reduce my student loan debt in half. To pay off the balance, I worked part-time as a research assistant and teaching assistant on campus, while having summer jobs as a server. When I started my first full-time job, living at home helped me to focus on saving and investing my hard-earned money.
Taking the aggressive approach (which does require discipline), gave me a clean slate at the start of my career and enabled me to focus on building my wealth. I encourage you to take advantage of applying for scholarships and bursaries because it’s free money that you could be leaving on the table.
Since interest rates on student loans are still relatively low, you may be considering contributing a portion of your earnings towards the stock market as it may give you decent returns. Keep in mind that no one can predict how the stock market will perform for any given year. In 2021, we experienced an all-time high in the stock market, where the returns of the S&P 500 were boosted by 26.9%. In contrast, this year the stock market has been a bit turbulent—which means it may be a good opportunity to buy stocks when they are at a discount.
Although it can be incredibly satisfying to hack away at your student loan, consider this: student loans are a low-cost form of debt. If you don’t currently make a sizeable income, or find you have more urgent priorities like simply paying your rent, you will need to determine how to juggle your obligations. Whether it may be saving up for a down payment for your first home or investing money in the stock market or maybe starting your own side hustle, it all depends on your comfort level and personal goals.
That said, first and foremost, it’s always wise to have an emergency fund. The typical advice is to have three to six months’ worth of expenses in a savings account you can easily access. Being a new grad, it can be challenging to balance all your expenses. So you can start by making smaller contributions and gradually increasing your savings amount. If you have other forms of debt, like credit card debt, you may want to focus on paying what has highest interest rates while making the minimum payments for student loans. This way you can reduce your interest payments and reduce the amount of time to get out of debt.
Let’s face facts: the effects of the pandemic from the past two years have made it tough for students to find employment (though we are seeing a rebound as unemployment rates fall to a record low of 5.2%). Some young professionals who are able to land a full-time job tend to start off with modest salaries. With the inflation rate rising to 6.8%, it can be challenging to make a decent living while paying student loans. If you need are in a situation where you need help paying off your debt, here are some ways to manage it.
You can apply for the Repayment Assistance Plan for the Canada Student Loan. Once accepted, the government will revise your payments (sometimes to as low as $0, depending on your income) and pay the interest for you in the meantime. (Note: you have to re-apply every six months.) For help with repaying the provincial student loan, you need to contact your student-aid office. If you have a loan or line of credit with your financial institution, you can find out your options by contacting your local branch.
Keep in mind that you will want to stay on track with your payments because this will affect your credit score. Future lenders use this information to determine how trustworthy you are when they lend you money. If you fall behind on your loan repayments, this will negatively affect your credit score. This could impact your ability to receive a mortgage or car loan down the road.
Instead, you could look at reducing your monthly payments or extending your repayment timeline to make your payments more affordable.
If you are an aggressive saver, take the fast lane—like I did—and pay it off as quickly as possible. Alternatively, you can take a medium-effort approach and pay it off within several years, while looking to distribute your money towards having a rainy-day emergency fund, investing in the stock market or putting towards a down payment on your first home. Rest assured, there’s nothing wrong with taking a slow and steady approach to paying off your student loans. Whichever path you choose, be sure to celebrate when you’ve paid it off as it will be a huge achievement.
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