Question from Victor, age 22: I just graduated from my undergrad debt-free but will definitely be taking on debt for my masters program. I have $15,000 left in an RESP, and I work in the summer and have a TA position during the school year, but tuition will cost $20,000, and life is expensive. I have been approved for a $40,000 student line of credit and now I’m worried that I’ll graduate $40,000 in the hole. Help!
Shannon Lee Simmons is a financial planner and founder of The New School of Finance in Toronto.
Answer from Shannon Lee Simmons: Post-secondary is expensive. If you’re borrowing on student loans or lines of credit, debt may be inevitable for the next few years. Just breathe. Getting an education is a good thing. And yes, owing money is scary, but if you plan for it, you can come out the other side with as little debt as possible. I call this a Controlled Debt Burn. It’s when you know you’re playing with fire and that it’s dangerous, but you’ve actually got it under control. It’s a financial harm-reduction plan.
Let’s say that you are doing a two year master’s program, have an RESP, a summer and winter part-time job and that you have access to $40,000 on a student line of credit.
Here’s how to manage a Controlled Debt Burn in this situation:
Step 1: Calculate your financial needs over the time period.
If you’re in school for two years, your Controlled Debt Burn needs to last 24 months.
Financial needs over 24 next months
- Tuition $20,000 ($10,000 × 2 years)
- Rent $19,200 ($800 x 24 months)
- Phone $2,400 ($100 x 24 months)
- Transit $2,400 ($100 x 24 months)
- Living $14,400 ($600 per month × 24 months)
Step 2: Tally up all money that you will bring in over the time period
If you know that you have some money coming in, add it to the total. Maybe you’ve got money from an RESP, maybe from a part-time or summer job.
Money coming in over the next 24 months
- RESP $15,000 ($7,500 x 2)
- Summer job $7,000 ($3,500 × 2)
- Teaching assistant job $5,700 ($2,850 × 2)
Step 3: Calculate the total shortfall
In our example, you’d be short $30,700 ($58,400 - $27,700). That is how much debt you will take on during your Controlled Debt Burn. Use the $27,700 from your savings and your jobs to pay for tuition and living expenses for the first year. When that runs out, you’ll need to turn to the line of credit. Once tuition and books are paid for, I suggest that you borrow $1,600 every month for your living expenses ($800 rent, $100 phone, $100 transit and $600 spending money) and put it into your chequing account like a paycheque. It will help you stick to the $1,600-per-month budget. Even though you could have borrowed $40,000, with a Controlled Debt Burn, you’ll only graduate with $30,700 owing.
A Controlled Debt Burn can help you stay in control when debt is inevitable. It will ensure you come out the other side with as little debt as possible. Future you will be both educated and happy you did so.
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