Paying back your student loans

#Exploring your options

Repaying your student loans can help you focus on future financial goals.

You’ve got the diploma, but now you have to deal with your student loans. Depending on the size of your loans, this could take months, years or decades to repay.

With road blocks like changing interest rates and unexpected expenses, imagining yourself student loan-free may seem like something in the distant future - but it doesn’t have to be.

There are many ways you can shorten your path to becoming debt-free. Follow these tips and a student loan-free future could become your reality much sooner than you think.

Starting off – where are you now?

Whether you’re a new grad or you’ve been in the working world for a while, you’ll eventually have to begin your journey to repay your student loans. Like a road trip with friends or a hike into the wilderness, it’s best to start by assessing where you stand. Take inventory of your student debt from all institutions and your available finances. Having a clear picture where you stand today is an important first step when looking towards the future.

Planning – create your repayment roadmap

Now that you know where you stand and where you want to go, it’s time to start the planning process. It’s a great idea to use a loan repayment estimator to map out how much you owe and make a monthly repayment plan that works for you. As soon as you can, you should establish a concrete plan for repaying your loans and pay as much as you can, as often as you can.

There are some things you should consider when you’re finalizing your plan:

  • What’s your interest rate? Your interest rate is perhaps the most important factor when it comes to creating your repayment roadmap. A higher interest rate means you should try as hard as possible to pay your loan off faster to avoid needlessly paying interest. For example, if you take 10 years to pay off a loan of $10,000 at 3.5 per cent, you’ll have paid $4,878 in interest. Compare this with an interest rate of 7.5 per cent on the same $10,000, on which you’ll pay $7,565 over the same amount of time. That’s a difference of $2,68
  • How much income are you currently bringing in? Bringing in more cash means you can make higher payments on your loan – simple as that. Figure out what your current income is from all sources and how much of it you can safely put towards your student loans.
  • Do you have other debt at a higher interest rate? If you do, it’s wiser to pay this off before putting everything you can into your student loan. Financially, it’s smarter to pay off $1,000 in credit card debt at a 19 per cent interest rate before putting all of your available money into your student loan at 3.5 per cent.
  • Do you have student loans from the government? If your loan is from the government (federal, provincial, or territorial), a non-refundable tax credit is available for the interest paid on the loans each year. You may be eligible to claim this amount for the year the interest was paid, or preceding five years. Unfortunately, this tax credit does not apply to interest payments made on student loans held with private lenders, such as banks. Regardless, this is a great bonus – you can put the money you receive from your tax return directly towards repaying your student loan.
It can seem like a long trip, but with the proper planning and financial guidance, you can reach your debt-free destination sooner than you think.
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Setting off – repaying your loans

You’ve assessed your situation; you’ve planned your journey, now it’s time to hit the road. Your first step will be to set up loan repayments with your financial institution. This can be done in several ways – from weekly, bi-weekly, to monthly. Bi-weekly is often considered a smart option, but can be tougher to manage due to the higher frequency of payment withdrawals.

Once you’re set up and making payments, your trip shouldn’t end there. Instead of coasting until you’re debt free, consider shifting gears on your plan if your financial situation changes over the course of your repayment period. Get a promotion? Inherit some extra cash? Win the lottery? Take that windfall and increase the amount you’re repaying.

There’s one more important thing to know – you don’t have to take this trip alone. A financial security advisor may help make your journey more bearable. Your advisor can help you design your debt repayment roadmap, help sort out possible roadblocks, and potentially help you find ways to repay your debt faster. It can seem like a long trip, but with the proper planning and financial guidance, you can reach your debt-free destination sooner than you think.