3 Things You Need To Know About Your Student Debt Before You Graduate

I wrap up my MBA in Finance next month, and I couldn’t be happier. After 20 months of full-time study, I’m financially and intellectually exhausted. I can’t wait to have evenings and weekends free again! I have learned so much, I feel like I can’t fit any more information into my brain. Hopefully the last 6 weeks aren’t too brutal. In the meantime, I’m already focused on graduation, and I imagine many others are too.

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For many students, graduation is the happiness of getting their degree is mixed with the misery of having to deal with their student loans. After years of not really worrying about the balance accumulating behind them, graduation day can be a big reality check. Every year, I encounter a number of myths and misunderstandings about student loans and the repayment process from students that are just finishing up their degree, or in the process of borrowing more money to continue their studies.

3 Things You Need To Know About Your Student Debt Before You Graduate

1. Your “grace period” might be payment-free, but that doesn’t mean it’s interest-free.

I’m genuinely horrified by the number of Canadian students that think their grace period is both payment AND interest free. If you’ve taken out provincial and federal student loans, you’re probably aware that you don’t have to make payments for the first six months after graduation. However, your student loans will still be accruing interest during this time. This means that six months from now when you have to start making payments, you’ll owe even more than you borrowed in the first place. As a result, your first few payments against your debt might not even bring it down to the amount you borrowed. Even if you can’t afford to make full payments against your student debt as soon as you graduate, any amount will make a difference. The longer you think your debt will haunt you, the more important it is to make a dent in the balance right form the beginning.

2. Your interest rate can go up without warning

Interest rates on federal and provincial student loans are usually fixed, but if you’ve taken out any sort of funding from banks, such as a student line of credit, your interest rate can go up. I experienced this with my student line of credit during my undergraduate degree. The interest rate was 5% when I first took out the line of credit, then shortly after graduation it shot up to 6.5%, and then to 8.5%. Thankfully I was aggressively paying down this debt as so by the time the highest interest rate kicked in, my balance was zero, but I still felt the pressure of “racing” against the bank to become debt-free before my interest reached a prohibitive rate. If you’re making small payments against your student debt, even a small interest rate increase can translate to a big drawback, so make sure you’re not only aware of changing interest rates, but that you prepare agains them by making more than the minimum payment against your loans.

3. You can’t discharge your student loans in bankruptcy.

The only way to get rid of your student loans is to pay them off. Bankruptcy does a number on your credit history, so it should never be anyone’s go-to strategy, but you’d be surprised how much people use the “I can always declare bankruptcy” to make them feel better about amassing a large amount of debt. However, most people are not aware that you cannot easily discharge your student loans in bankruptcy, if at all. This means, even if you legitimately can’t pay your student loans, you still legally have to. So that will throw a wrench in your plans if bankruptcy was your fall-back exit strategy. If you live in the US, discharging student loans in bankruptcy means suing your lender — even if that’s the federal government. Good luck with that, the lawsuit might cost you more than your degree did.

I paid off nearly $22,000 in student loans in less than 22 months after my bachelors degree. It wasn’t easy, but I’m glad I got rid of the balance quickly so I could move on with my life after college. I hated paying the bill for costs I’d rung up when I was 22, which is why I’m glad they’re not still lingering over my head now.

You should make a concerted effort to become debt-free within 3 years of graduation.

Not only will this reduce the overall amount you pay, it will keep you from getting debt fatigue, which is a feeling of burnout from continuously making payments against your debt. Paying of debt is a marathon. On more than one occasion, you will feel exhausted and wish it would end, but somehow manage to force yourself to keep going.

If 3 years is too much, see if you can do it within 5 but expect to hit some bumps along the way. A five-year project of any kind is a big undertaking, and the fact that it’s debt might make it all the more miserable. My advice is to not forget what you bought with the money. By keeping in mind where the student loan money went, it makes it easier to tolerate paying it back.

One of the best ways to come to terms with your student debt is to utilize the education it got you.

I know I wouldn’t have a university degree if it weren’t for the student loans I took out in undergrad to pay my tuition. After I graduated, my degree got me a great job which improved my standard of living and provided enough income for me to pay off my debt. I further leveraged that initial investment by going on to get an MBA, which has led to the career (and income) I have now. Landing that first job after graduation can be difficult, but the last thing you want to do is stay in a role that doesn’t maximize your investment in education. I was working part-time in retail before I got my first grad job, and if I had stayed there, my education would have all been a waste. What really determines if your education is worth it or not is what you do with it.