What students need to know about credit cards and loans
Or, why it’s best not to pay for spring break with a cash advance
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Several years ago, Avraham Byers got himself into money trouble on his college campus. “Someone was giving out credit cards to students and I thought I could handle it,” says Byers. “But I was definitely a spender, not a saver.” Byers started with a $500 limit on his brand-new credit card, spent it, and paid it off, but the credit card company then gave him more credit without asking—$3,000 more. “I spent that too,” remembers Byers. “It was so easy to get.”
Byers, author of Your Magic Number and a financial money coach, learned an important lesson.“You have to stay focused on minimizing debt while at the same time enjoying the university experience. That’s tough to do,” says Byers.
Byers is right. And these days, students have four basic ways they can borrow: government loans, lines of credit, credit cards, and—finally—the bank of mom and dad. The most popular is the use of government loans, which are usually the cheapest option. Debbie Gillis, Director of Credit Counselling at Resolve Credit and Financial Services Resolve Counselling Services, is a big proponent of managing your debt, adding that there are several different government loan options available for students that are worth considering. “The great thing about them is that they have a pre-set amount,” says Gillis. “Of course, they come with interest that will eventually have to be repaid but you don’t have to worry about repaying them until you graduate and have a full-time job. The downside? “Students often borrow to the max because of it, so be mindful of that,” says Gillis.
Just one example is province of Ontario, which has the Ontario Student Assistance Plan (OSAP). The payback rules are simple. If you get money through OSAP, you have six months after you graduate or leave full-time studies before you need to start repaying your loan. You won’t be charged interest on the Ontario portion of your loans during those six months but you will be charged for interest on your Canada portion of those loans.
In Ontario, the interest rate applied is prime + 1%, the federal loans are prime + 2.5%. With these loans, it’s important to realize that your monthly payment stays the same, but the amount applied to your loan balance, or “principal” will change as interest rates change—meaning it will take longer to repay your debt if rates rise if you stay on the same monthly repayment schedule.
Student lines of credit and are more flexible and you are charged interest only on the amount you use. “If you’re disciplined, you get a little more control over what you owe,” says Gillis. “The downside? “There has to be a co-signer on these loans and you have to make payments and at least repay the interest while you’re still in school.” Still, lines of credit do keep the debt in the forefront of your mind instead of the looming government loan at graduation.”
Credit cards too can be flexible but again, you will need to make payments—at least payments on the interest—while you are still in university. Unfortunately, their flexibility and easy access are also their drawback. “Temptation is everywhere when you’re a student,” says Matt Matheson of methodtoyourmoney.com “For example, that spring break trip you simply have to take with friends to Aruba. You have to put that out of your mind to a large degree if you want to keep debt low as a student.”
The debt numbers can grow rapidly. For instance, notes Matheson, a spring break vacation often means about $2,000 for a week of frivolous fun. Multiply that by one annual trip for each of four years and all of a sudden, you’ve added $8,000 to your debt load, plus interest. “All this borrowed money has to be paid back—whether it’s credit card debt, lines of credit or government loans,” says Matheson.
And while parents—or the bank of mom and dad—can also be tapped for student loans, be very careful if you chose this route. In fact, Byers recommends that you formalize the loan with a signed document outlining the terms of the agreement. “That way, everyone knows the repayment rules once the money is borrowed and spent,” says Byers.
The lesson? No matter what type of debt you chose, always do the basic math ahead of time so you know what the student debt is costing you. As well, keep spending in check by tracking your cash flow so you know where your money is going notes Trevor Van Nest, founder and owner of Niagara Region Money Coaches. “You need to do that to make informed trade-offs with your money,” says Van Nest, who also advises students to have a small emergency fund in place so you don’t dip into your credit card or line of credit needlessly. “It could be for emergency dental work or a car expense, but what the emergency fund will help you do is not pile on more debt needlessly,” says Van Nest. “Just $1,000 in the fund can be effective in staving off more debt.”
In the end, the key to successful debt repayment is knowing how much you have to repay and to whom, and to start a repayment schedule as soon as you graduate. That means figuring out the total amount you owe, the interest rate that will be applied to your debt, how you’ll repay your debt, how much you’ll pay each month and how long it will take you to finally get back all of your debt. And of course, try to pay off your highest interest rate debt first, and then add that payment amount to your next highest interest rate debt and so forth until all your debts are paid off.
And finally, when you graduate, do the smart thing and make debt repayment a priority, with the aim of having all your student debt paid off by age 30. “You can then start using the money you were making for debt repayment for other things, like saving for a home or condo, or even retirement savings,” says Van Nest. “It can be the start of great lifetime savings habits if you stay on top of it.”