Wednesday, June 25, 2014

How I paid off $32,000 in student loans in one minute

In fall 2014 Daniel appeared on the More Money for Beer and Texbooks podcast to discuss this article. Watch the podcast here.

I generally don’t write about myself, but this picture generated so many questions and comments that I thought I should share my experience in paying back $32,000 in student loans in one minute.

The average Ontario student pays $7259 per year to go to university or $2400 per year to go to university.  Across Canada, the average student graduates from their undergrad with $25,000 of debt.

I’ve been a full-time student for the past six years, completing my B.A. at Carleton and being just months away from finishing my M.A.  By June 18, 2014 I owed $31,909.07 in student loans from the federal and Ontario government.  Yikes!  But for me, at 3:40pm I walked into the bank, and one minute later I owed $0.00.

How did I do it?

Start Early
Going to college or university is a big financial commitment.  When I was 13 my school had career planning workshops that sparked our thinking about what we wanted to do with our lives, how much schooling it would take, and how much that would cost.

By 15, I was just 3 years away from graduating high school and didn’t have any savings.  My parents and I visited a financial advisor and opened up a Registered Education Savings Plan (RESP).  My parents and I would contribute $250 per month to the plan.  That’s $3000 per year before interest.

Work in High School
You’re going to need to work.  This garbage about students being “too busy” to work just doesn’t cut it, and it especially won’t cut it if you want to graduate debt free.  I started working when I was 8 years-old.  Paper routes, cutting grass, delivering phone books and magazines… I did it all.

When I was 15 I began working in a restaurant.  Back in the day (wow, that sounds so long ago!), I was making minimum wage at $7.75 per hour and working about 15-30 hours per week.  Yes, during school.  Again, suck it up and get it done.  During the summers I would work more.  The most I worked during the summer was about 108 hours over two weeks.

By my 16th birthday I was a manager and making more money.  Most of that money went towards school savings.

Apply for OSAP
Now it’s a few months before school starts, and it’s time to apply for a student loan.  OSAP is inherently the best option over a bank loan or student line of credit, since the former allows you to borrow the money interest-free for as long as you’re in school.

Gather all your paperwork and do your application as early as possible.  Their online application system usually opens in May for September start dates.  Be as thorough as possible, and ensure you answer everything as accurately as possible.  This will ensure the actual amount you receive is as close as possible to what they estimated you would receive.

OSAP’s funding formula is allowable education costs – expected financial contributions = financial need.

Let’s break down each of those categories:

“Allowable education costs” = things like tuition, books, school supplies, etc.

“Expected financial contributions” = exactly that.  OSAP expects that you and your family will save for your education.  You need to make an effort to save for your education (see my “work” point above).

“Financial need” = This is the need you have demonstrated by considering the two points above.  If your parents make $200,000 per year, you most likely don’t have financial need.  Some of this “need” determines how much the government will loan you vs how much it will grant you (i.e. you’ll never have to pay it back).

Apply for bursaries and scholarships
There are thousands of bursaries and scholarships out there.  For every field, every topic, every major or minor, every type of student, there are dozens of potential bursaries and scholarships.  Apply for them.

Take More OSAP than you Need
Yes, you read that right.  I said take more OSAP than you need.  Remember OSAP’s definition of financial need above?  Sometimes that means the government says you’re entitled to $12,000 in funding, even though your tuition is only $7000.  OSAP will give a common law student up to $560 per week or a single student up to $360 per week.

Now What?
OSAP just gave you $12,000 and your school took $7000, leaving you with $5000.  Free trip to the Bahamas right?  WRONG.

Save that money.  $5000 in a savings account making 1.3% compound interest will make you just over $65 per year.  It’s not a lot.  But the point here is that you’re borrowing money interest-free and making money off it.

Rinse, lather, repeat and that money adds up after time.  Take this easy example:

$12,000 per year in student loans over 6 years = $72,000 YIKES!

But wait.  You saved $5000 from each of those years, meaning you have at least $30,000 in a savings account accruing interest over 6 years.  That still leaves you with a hefty $42,000 balance, but we’ll take care of that shortly.

Work in College/University
Just like in high school, you’re going to need to work.  Many university and college students complain that they’re too busy with school to take on a part-time job.  Garbage.  Make time for it and you will have time for it.  Most university and college students only have between 20 and 30 hours of classes and tutorials per week.  What are you doing the other 148 hours of the week?  You can’t squeeze in working somewhere for 20-30 hours per week?  Of course you can.

And with school getting out in April or May, that leaves you with at least 4 months of working full-time.  Save $500 per month during these months and you’ve got $2000 saved.

Why make pre-payments?
So you’ve been working for a few summers and have some extra cash saved up.  You should probably pay down some of that $42,000 loan, right?  No! Why would you?

You have an interest-free loan.  By paying down the principal you’re giving up the opportunity to make interest off having the money in your account.  That money could be making you money instead of giving it back to the government.

Have an extra $2000 from working extra shifts in the summer? Save it.
Have your tax refund cheque coming in May?  Save it.
Get $100 from your favourite grandma? Save it.

It all adds up.  If you’re looking for a better return, look into purchasing a GIC (or several GICs).  These are simple, no-risk savings products that can often get you a better interest rate in return for locking in your money for a set period of time.

So let’s summarize:
6 years of university at $12,000 per year will mean you have $72,000 in student debt. OUCH!  However…

-$30,000 from saving $5000 per year for 6 years (and this doesn’t include the interest gained)
-$20,000 from that RESP that had been accumulating for 6 years
-$12,000 from saving $500 per month for 4 months every summer
-$9600 from saving $200 per month for 8 months every year while in school
-$400 in miscellaneous savings (part of a tax refund, extra birthday money, etc)

= $0 student debt after 6 years

That’s how I did it.  You can too.

1.      This story has been provided for informational purposes only.  Some numbers have been rounded for ease of stating them and are not my actual financial figures.
2.      In no way am I warranting this advice or suggesting that you make the same financial decisions.  Always consult with a qualified financial professional.
3.      Always ALWAYS keep your file up to date with your school’s financial aid office and OSAP.  They’re not always the easiest to get a hold of, so keep meticulous notes when you do anything with your student loan: who you speak to, what they said, what you said, etc.
4.      Always ALWAYS ensure that you have properly declared all savings and assets.