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How to take the edge off 'scary' student debt

At the time, it was a choice between focusing on his university grade-point average and planning ahead to pay off his student debt - and James McDonald chose the former.

Now, the recent Memorial University graduate is finally starting to pay attention to the bills piling up and says he feels his student debt of $50,000 is almost "insurmountable."

"I know that is silly and I will pay it off, but I feel like it will take years," he said. Mr. McDonald recently moved to Toronto and started working as the president of the Canadian University Press and hopes to find work as a full-time journalist.

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As costs rise, more and more students are relying on loans to help finance their higher education. The proportion of graduates in debt increased from 49 per cent to 57 per cent in the last decade, Statistics Canada found in 2010. It's a trend that Bradley Roulston, a certified financial planner, finds disturbing.

"Student debt has become socially acceptable and a way of life," he says. "When I graduated from university, maybe a third of people had student debt. Now, it's the norm."

Mr. Roulston works with high-school and university students and finds that for many of them, the concept of paying back debt only becomes a reality once they graduate.

"For example, in B.C. and Ontario, interest payments start accumulating the day students graduate, even though the first payment isn't required until six months after graduation," he said. "And it's really during this consolidation period that I think it finally hits students that they not only have debt, but they now need to start paying it back."

The problem is that many students have very limited exposure to financial planning, said Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada.

"That's a very scary thought," he said. "It's absolutely vital that parents sit down with their kids before they even start applying to universities [to talk]about how they are going to plan to pay for it."

For some parents, that can mean monthly contributions to a Registered Education Savings Plan.

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"The downside with an RESP is that the government is giving support to only those families that can make RESP payments in the first place," Mr. Roulston said. "There is this division of classes, where people who have money can take advantage of the system, and those who don't get further and further into debt."

Many students who approach Mr. Roulston say they are unable to pay down debt because they can't find employment, and he encourages them to consider alternatives.

"If they have challenges getting work, they can ask for interest relief," he said. "If you have student loans from the government, don't consolidate it with the bank, because you have a lot of advantages, such as tax benefits, if you keep it with the government."

He also advises against declaring bankruptcy because that can have a long-term impact on a young adult's credit rating and borrowing power.

Useful websites

How to prepare for financing higher education

Tips from Patricia Lovett-Reid, senior vice-president of TD Waterhouse Canada

  • Parents and children should have an open discussion on how they can collectively plan to pay for higher education. This conversation should be an ongoing process that gets started while kids are still in high school.
  • Consider a university with lower residence fees or one located in a city with cheap rent. Alternatively, students should consider living at home and attending a local university or college. Be practical about making a sound financial decision, rather than letting emotions get in the way.
  • Students should draw up a monthly budget, including all income and expenses, with the whole year in mind. For example, in September, when students often start their leases, they will have to put down the first and last month's rent, as well as possible moving expenses.
  • Keep receipts to identify expenses and consider shedding any that are not strictly necessary. Be pragmatic, and identify "needs" versus "wants."

Editor's Note: An earlier online version of this story spelled Mr. McDonald's name incorrectly.

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