Building Blocks is a special personal finance web series geared towards educating families on money-related topics. A collection of stories, videos and discussions, Building Blocks will run online until the end of December.
Easy-to-obtain credit cards and student loans means many college and university grads enter the working world with more than diplomas and high hopes - they are also saddled with hefty debt loads. After graduation, they face the prospect of piling on more debt in the forms of mortgages and lines of credit. Before they know it, Gen Xers and Ys can find themselves buried more deeply in loans than their parents could ever have imagined.
One thing is certain: digging out from under the debt heap will prove more difficult than building the money mountain in the first place.
Most people have an unbelievable fear of living in a cash world. They can’t imagine living without a credit card. — Margaret Johnson, president of Solutions Credit Counselling Service Inc.
So just how do young families struggling with heavy debt loads deal with those financial institutions, once so eager to lend, now asking for payments on credit cards, lines of credit, mortgages and student loans? Unless an inheritance providentially appears, the formula for success consists of discipline, a plan and time.
Alex, an IT industry worker, and his school-teacher wife Sam (they did not want their last names used) are illustrative of how debts can quickly erase any post-graduate euphoria. The two mature university students, both in their early 30s, had accumulated nearly $110,000 in red ink - a combination of student loans, credit card debt and personal loans.
Personal circumstances forced Alex to become a part-time student, which meant his student loans immediately began accruing interest. He lost his new job and ran out of new sources of credit. The couple enrolled in Credit Canada's credit counseling program and have graduate married, with a seven-year-old son and no debt. The couple is now redirecting the money that has for so long been paying off their debt load towards a down payment on their first home.
“We’re free and clear right now,” said Alex. Under the program, the two drew up a budget with a counselor. Going out for dinners and entertainment disappeared immediately, a lifestyle change that got easier when they had a child. “Really the biggest change is just being conscious about the money that is coming in, the money that is going out and not having that constant feeling of `Where did all my money go?’ which was definitely the case for both of us beforehand.”
The combination of young families and out-of-control debt is all too common, said Laurie Campbell, executive director of Credit Canada, which provides debt management programs in the greater Toronto area. Her group regularly sees young families with a child or two living in their parent’s basement. “They can’t handle living on their own because of their current debt situation which is usually high student loans and high credit debt.”
While financial experts often say people should look to pay off their most expensive debt first, such as those 28 per cent store credit cards, Ms. Campbell suggested those drowning in debt take a long, hard look at their lifestyles. Are two cars with their attendant loan payments, insurance, maintenance and parking costs really necessary? Many young families are also camped in more home than they can afford, barely scraping by with a 35 or 40-year mortgage. “It may mean they need to sell their home, significantly scale back in order to deal with this debt because it is not going to go away and their current lifestyle can not sustain it.”
Ms. Campbell singles out daycare costs (which can run as much as $700 to $800 a month) as a major household expense that might be offset with the assistance of family and friends.
