Here’s a true story about a teacher with a 60K salary who couldn’t get ahead because of student loan debt. It’s a sad reminder that education has become a financial chain, rather than head start for many young Canadians. A few months ago, I helped a teacher drowning in student loan debt. The sad thing was that the young man had done everything right. He graduated high school, went to a good Canadian university, became a teacher, and finally entered the workforce, ready to pay back his loans and start building his financial future.
Yet, debt had a different path for him. He entered the workforce with over 40K in student loan debt. This is higher than the national average in Canada (between 25K and 30K, depending on the province), yet it was manageable. His monthly student loan payments were $500 per month.
The problem was that while he eventually landed a good-paying job (a teacher at a private high school) and earned 60K per year, like most teaching careers he began slowly. He needed to take contract jobs for a few years while building his resume and so delayed things like saving for a home or building an emergency fund.
The years passed and debt crept in. When he contacted me, he was now 38 years old. His four years of undergrad combined with another year of teaching college left him with 40K in student loan debt but he had also incurred an additional $40K of consumer debt due to trying to pay back his student loans and meet his general living expenses. He rented a house 45 minutes away from the school he taught at, as he couldn’t afford to rent or buy in the higher end neighbourhood that his private school was located. This meant his car payment, gas, insurance, maintenance and so on exceeded $700 per month.
His gross income was approximately $60K before taxes. But his debt repayment had risen to over $2200 per month. This is a very bad debt to income ratio and requires careful budgeting and restructuring to reconcile.Despite a deep desire to do so he has not been able to enter the housing market, as he has been unable to pay down his debt or save for a down payment required to qualify for a mortgage. He is reluctant to marry his long-standing girlfriend as he fears he will not be able to support a family based on his current situation.
This situation led Steven into dangerous territory. Like many Canadians, student loan debt makes young people defer important life events such as buying a car, investing in your first home, getting married and having children.
For the average Canadian our greatest asset is our home and often retirement is funded by downsizing and releasing equity in a home.
As a result, student loans often prevent young people from taking this first step towards equity. They rent. They borrow more. And despite earning good wages (like Steven’s 60K teaching job), they never get ahead.
So what did I tell Steven to do?
Debt versus income ratio
I worked with Steven to consolidate his consumer debts, build a budget, and worked out a realistic plan to start building equity. Steven has a good income but the mistake he made was in not treating his student loan like a business investment.
If I could speak to Steven in his twenties, I’d sit down with him and calculate a debt versus return ratio. He’d see that borrowing 40K to get a 60K job has a lot of risks.
For example, there would be the opportunity costs of not being able to save for a home, the risk of more debt, and the overall interest payments.
I think that is the biggest lesson we can teach youth: education is an investment and like all investments it has risks. Just because Canada Student Loans will give you money doesn’t mean you should accept it. For many Canadians, education has been a very poor financial decision.
Because as Stevens story shows debt often leads to more debt. And while Steven had options with his consumer debt, student loans are harder to consolidate. They are financial chains that will be with you most of your adult life.
In my opinion every student should only take on a student loan when they have fully researched the potential long-term impact and the realistic anticipated outcome.
When taking on a student loan you are investing in your future and as with any investment the potential risks and returns should be fully understood. It is recommended that each potential student complete a ‘business plan’ or ‘education plan’ before taking on any student loan.
While there is always a path out of debt, student loans are a particularly insidious form of debt that can send you down a very difficult financial road. Borrow as little as possible and consider whether the education you are buying will pay back the needed return.
Troubling Statistics about Student Loans
In recent years, some troubling numbers are showing that student loans in Canada are reaching a crisis point.
- Federal student-loan debt in Canada is now more than $15 billion
- Provincial loan programs are estimated to be as much as $8 billion
- On average post secondary students graduate in Canada with more than $26,000 in student loan debt
- Graduates in B.C. see this number increase to nearly $35,000
- Government share of university operating has declined
- Tuition fees in Canada have increased
The aggregate of loans disbursed by the Canada Student Loans Program, less the aggregate of loan repayments received is resulting in student debt increasing by $1 million per day.
The situation in the US is even worse.
- The amount of outstanding student debt has reached $1 trillion
- Student loan debt in the US is higher than credit card debt
- 35 percent of student loans in the US are delinquent, the lowest repayment rate the Department of Education has ever seen
These numbers show that student loans are risky. They can quickly lead to consumer debt and give you a poor financial footing to begin adulthood.
What should you do if you miss student loan payments?
Below are a few resources. If you live in Canada, you can also speak to one of our debt experts for free.