How to get, spend and pay back your student loans

The very heart of Money After Graduation is my own journey out of student loan debt. I started with nearly $21,000 and now with less than $5,000 to go, I’m nearly at the end of my journey — but plenty of others are just beginning or in the middle of theirs! With the average student loan debt upon graduation approaching $27,000, graduating in the red is not uncommon. In my Googling I found this nifty counter that actually shows the $15 billion+ student loan balance in Canada  growing at an alarming pace. Ack!

Since the student loan system isn’t necessarily the most straightforward, I figured a short summary post of the process might be in order.

How to get a student loan in Canada

In Canada, student loans are administered by the provincial and federal governments. This means you apply directly to them to secure funding for your post-secondary education. In some provinces, it takes only one application for both the federal and provincial student loan services, but depending where you live you might need to fill out two applications.

Many students that are just beginning their university career think that they go through their school for the student loan application process. While some universities might offer services to help you work through your student loan application, some might not. The information on how to apply for student loans in your province is available here.

While the ideal is obviously to get through school without borrowing, but as the cost of a post-secondary education rises, that becomes less of a feasible option for many students. Personally, my parents didn’t save any money for my university education and earning enough to pay for it, even though I worked throughout my degree, wasn’t possible either. Student loans can be a positive investment if money is what is keeping you from getting an education you need.

How to spend your student loan

Sometimes, your student loan disbursement will go directly to the school, and then if there’s anything left over, it will be deposited into your bank account or a cheque will be mailed to you. How you should spend any leftover money after your tuition is paid is on living expenses — don’t be like me and spend it on clothes and dinners out! I think I’d owe half of what I did if I had just spent it more carefully throughout my undergrad. While I eventually caught on to more responsible ways and saved a bit of my student loans, I could still have spent more wisely.

While a somewhat untraditional route, I encourage students to treat their student loans like income and save a portion of the funds, just as they would a percentage of their paycheque. This not only builds the habit of saving early on, it lets you graduate with some financial assets that you can then use to pay off your student loan at graduation. By saving some of my student loan money, I was able to make a $5,000 student loan payment at one point, which significantly reduced my overall balance and saved me a whack of interest.

How to pay off your student loan

Generally, immediately after you graduate your student loans enter a grace period where they’ll be accumulating interest but no payments will actually be due. At the end of the grace period, you’ll have the option to make a lump sum payment of the interest that accumulated during the grace period or to roll it into your student loan. I STRONGLY encourage you not to take advantage of the no-payment grace period and just start paying your student loans right away. It doesn’t matter if you’re not in a glamorous career or if you’re just working part-time, start paying right away. This not only gets you into the habit of making payments, it reduces your student loan balance and thus also reduces the amount of interest you pay over the term of the loan. During the grace period, I managed to pay down $2,500 of my student loan debt — more than 10% of the total balance! It may not seem like it made a huge difference but I certainly appreciate that my current debt isn’t $2,500 + interest now.

Likewise, making the minimum payment will get you nowhere. You should always make more the minimum payment on your loans. In fact, you should pay as much as you can while still meeting your other financial obligations and not stretching yourself too thin (and in my opinion, also keeping some semblance of balance and fun in your life).

If you borrowed from multiple lenders, particularly as private loans as opposed to government ones, it might be worthwhile to consolidate your debts at a lower interest rate. Ultimately your main goal should be to pay off your student loan as quickly and painlessly as possible.

Long story short: borrow as little as you need and pay it off as quickly as you can.