How fast should you pay off your student loans?
Congrats on your graduation! You’ve probably also accumulated $40,000 in student loans and now have to find employment as quickly as possible to begin adulting. Debt can cause a lot of stress and strain on relationships especially when you’re not in control of your finances. Canadian student loan goes through 3 stages :
In study period - this is the period you’re in school. Your loan is interest free during this time as long as you confirm enrollment every semester in study to avoid accruing interest.
Non-repayment period - this is the grace period where you are not required to repay your loan yet and lasts for 6 months after finishing your studies. Depending on your loan type, interest might begin accruing during this time.
Repayment period - after the 6 months non-repayment period, you will be required to start repaying your loan. It’s important you check with National Student Loan Service Centre (NSLSC) to confirm amount owing, repayment start date, interest rate, monthly payment amounts and time it will take to repay your entire loan.
Image credit @NSLSC
To repay your student loan, there are two approaches to choose from depending on your priorities and desires. We will discuss the advantages and disadvantages of both:
As fast as you can aka the aggressive approach
You probably hate debt and want to get out as fast as possible. This is the aggressive approach to debt repayment which is advocated by financial coaches like Dave Ramsey.
Below are some of the ways you can achieve your student loan repayment as short as possible:
Make a budget. A budget is a tool to track money coming in and going out. A debt repayment strategy should be part of your budget and any savings in other areas of your budget should be put towards your student loan repayment.
Earn additional income. Take as many side hustles as you can to earn extra income and direct that extra income towards your student loan repayment.
Reduce your expenses as is painfully possible. Skip coffee dates and dinners, brown-bag your work lunch, shop at discount stores, coupons and flyers are your friends. Be as cheap as possible as long as you know why you’re doing this.
Use every bit of windfall income towards your debt. Company annual bonus, new job signoff bonus, tax refund money, etc. Channel every bit of this towards your loan repayment.
Sell things you no longer need. Sell the extra stuff in your home – that PS4 you no longer use, clothes, household stuff and use that cash towards your debt repayment.
Pros of aggressively paying off student loan
You become debt-free fast.
You don’t accumulate interest in the long term.
The stress and strain that debt can bring to you and your loved ones in the long term are avoided.
Cons
Your quality of life is negatively affected. Living off the grocery store frozen alley every day is no fun and so is missing all the brunch dates with your girlfriends. If not careful your mental health could be compromised.
Debt fatigue is a real thing. You begin to hate your new life; you feel lonely at times since you cannot afford dinner or a night out with friends.
Your friends and family will not understand why you’re doing this. Lack of support might slow you down or make you fall off the track therefore if you choose the aggressive method, be sure your why is big.
Other goals and objectives in your life are compromised. For example, you don’t have an emergency plan, no savings and if you lose your primary source of income, you will not have finances to carry you through.
2. As slow as is possible aka the laidback approach
Nobody enjoys carrying large amounts of debt but other goals of your life shouldn’t be sacrificed. Things like building an emergency fund, investing for your future and that of your family, and paying down credit card debts. Adulthood 101, yay!
Here are some of the ways you can navigate the laidback student loan repayment approach:
You will need a budget
When you’re just starting out in the post-graduation it’s easy to miscalculate your living expenses vs your income… You cannot afford to fall behind with your payments as this will negatively affect your credit score.
Student loans debt is pretty cheap compared to other debts like a credit card.
Federal and provincial student loans interest in Canada is pretty cheap compared to other consumer loans you get from the bank.
Read: Canada student loan interest
You need an emergency fund first
Emergency savings is money set aside for a rainy day which is equivalent to 3-6 months of your monthly expenses. These funds will come in handy in case you lose your job, get a pay cut, have major car repairs, emergency home repairs, unplanned pregnancy, and unexpected but essential travel.
If you’ve used your emergency savings, replenishing them is key to ensure you have them for next time.
There are other things to do with the money
One of your goals might be to buy a home in the future. To achieve this, you will need to save for a down payment and closing costs. Use your budget as a tool to track your savings as well as your debt repayment.
Any extra income you earn should be put towards debt payment
If you can, minimize your monthly expenses as soon as possible. This can be done by moving in with family and living with roommates. Some companies will offer student loan repayment as part of employee benefits. Do not say no to free money!
Your hands might be full already that you cannot take extra side hustles, which is okay. But if you’re able to, earn extra cash on the side and use it entirely to repay your student loan.
Pros of the laidback approach
Your quality of life is not compromised. With a solid financial plan, you will still be able to dine out with friends, take a road trip or treat yourself to something you’ve been wanting.
Your other financial goals and objectives are kept in momentum. Saving for a down payment to buy a home, building an emergency plan, and investing are other financial goals that you get to do alongside your student debt repayment.
Cons of laidback approach
It takes a long time to pay off your debt. Seeing the big debt in your financial plan is no fun.
You must be disciplined in following your budget to succeed. This is important because a lot is going on – your income, your living expenses, your credit card loan and student loans, savings, investment, etc. If you don’t follow your budget strictly things might fall apart pretty quickly.
You accumulate extra interest in the long term. You will be charged interest for as long as your loan is outstanding which is an extra expense.
What’s the right balance to pay your student loan?
Your end goal is still to be debt-free so even though you’re taking a laidback approach, you will still need to focus on this. Either approach requires that you stick to a budget. The sooner you break free from debt, the better.
Whatever approach you choose should be manageable and humane. The worst thing you can do to yourself is to compromise your mental health to become debt-free. Mental health will determine how you succeed at work, in your relationships, your health, etc., therefore, should be safeguarded at all costs.
Other Questions Readers Ask
Do you have to pay back Canada student loans?
The answer is yes. If you miss 9 months of payment, your federal student loan will be forwarded to Canada Revenue Authority (CRA) for collection which ruins your credit score.
2. Do student loans in Canada go away after 7 years if defaulted?
No. Even if you decide to file for bankruptcy, if it’s done within the first 7 years of completing your studies you will still need to continue paying back your student loan as it will not be erased. After seven years your student loan may be forgiven if you declare bankruptcy.
3. How can I apply for a student loan in Canada?
Step by step Canada student loan application
Got more questions? Ask a Topspin Finance Money coach.