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

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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

Your student loans might not be on your mind if you’re still a student, but if graduation is coming up, there’s three important things you need to consider. 

1. Your Grace Period might be payment-free, but that doesn’t mean it’s interest-free

Contrary to popular belief, your grace period is not 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. Go ahead and allocate $50 or $100 per month towards the balance during your grace period. 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 further to 8.5%.

Thankfully I was aggressively paying down this debt. By the time the highest interest rate kicked in, my balance was zero. Nevertheless, 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 aware of changing interest rates. And that you prepare against them by making more than the minimum payment against your loans.

3. You cant 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.

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.

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I paid off nearly $22,000 in student loans in less than 22 months after my bachelor’s degree. It wasn’t easy, but I’m glad I got rid of the balance quickly. I was able to move on with my life after college.

I hated paying the bill for costs I’d rung up when I was 22. This is why I’m glad they’re not still lingering over my head now.

Make an effort to become debt-free within 3 years of graduation

Not only will this reduce the overall amount you pay, but it will also keep you from getting bogged down by debt fatigue. Paying off 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 its 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 use 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. This 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.

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

8 Comments

  1. I too am horrified by the number of students that let their grace period slide, unknowingly accruing interest. Haven’t heard of a student line of credit, but the idea of a fluctuating interest rate (especially that high) sounds really scary.

    • It was SO scary. Every 2 months I’d just get a letter from the bank that they were increasing it another 0.5%

      But I guess on the upside that made me get rid of that debt super fast..

  2. Great advice. Back when I was a 21 year old fresh with an undergrad degree, I wish I realized that the grace period was not interest free. I remember I had to pay the entire interest amount first before I could make a first payment and that was an ugly reminder. I’m so close to having the total loan paid off, I get giddy thinking about it (nerd alert ahah!) Your last point is the one that really drives home the point of getting a degree in the first place too, I’m so fortunate to be working the field I studied.

    • Right?? It’s such a downer! I paid just over $1,000 in interest on my student loans — that’s a few months worth of minimum of minimum payments, and that’s even with avoiding the grace period!

      Glad you found a job in your field, it isn’t always an easy thing to do!

  3. I think that people might be confused about the student loan grace period because they don’t know where their loan money is coming from. For example, only the federal portion (70%) of your loan accrues interest during the grace period if you have OSAP, while the Ontario portion is interest-free during this time. Maybe people figured that since they have OSAP, the money is coming from Ontario, so they don’t need to pay for anything for the first six months. The fact that OSAP does NOT divide your loans into federal vs. provincial, like how Alberta does, also adds to the confusion. When you pay for OSAP, it just goes to the total sum. You can’t choose whether you want to pay more on the federal part and the minimum for the provincial to save money on interest.