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Many personal finance bloggers will tell you that the best solution to student debt is to avoid it altogether. Good advice, but hardly realistic for many of us. If you lack family wealth or full scholarships, the only way to fully avoid educational debt may be to forego education. Working your way through school is an excellent option (I worked full-time during my undergrad and part-time during law), but if you plan on pursuing a professional degree (medicine, law, or dentistry to name a few) it is unlikely you’ll be able to earn enough to cover even your living expenses, let alone the astronomical tuition fees being charged.

I consider myself to be a bit of a reluctant expert on student debt. I graduated from law school in 2005 with ~$100,000 in student debt. This may seem high, but isn’t unusual- of the 10 young lawyers at the firm where I articled, the average student debt was in excess of $75,000. I didn’t begin making any payments on the principal until 2006 (during my articling year, I barely made enough money to cover the interest pyments), but in the past two years I have managed to reduce my debt significantly, and hope to have it paid off fully in the next 2-3 years. Here’s how I have approached debt repayment:

1. Look for Debt Forgiveness - Many provinces offer varying degrees of debt forgiveness and interest relief on government student loans. Find out what is available and what you need to qualify. For example, NL offers what amounts to a total forgiveness of the provincial portion of student loans provided that the student has successfully passed all courses and completed his or her program within a specified period of time. This can be worth thousands of dollars.
2. Consolidate - If you have loans from different sources, you may be in a good position to consolidate your debt at a lower rate. This can lower your rate and make the daunting task of paying down your debt a little more simple. Banks generally realize that new graduates (especially those with professional qualifications) experience significant income growth in their early years and make excellent long-term customers, and many will be willing to offer attractive consolidation packages to secure you as a client. However, be sure to check out the tax consequences of consolidating government student loans, though, as you are eligible for a tax credit on interest paid on these loans (but not if you consolidate them). While it varies based on your provincial tax credit amounts and the interest being paid, you generally need to find a rate at least 2% lower to make it worth consolidating a government student loan. For readers in the US, check out the post over at Simple Debt-Free Finance regarding consolidation of US federal government loans.
3. Develop a Plan and Stick To It - There are many different schools of thought when it comes to debt repayment, the most popular generally being Dave Ramsey’s “Debt Snowball” and its variant, the “Debt Avalanche”. You may choose to follow one of these plans, or maybe for emotional reasons you want to pay off one debt before the others. Regardless of your methodology, you need to develop a clear plan for your debt repayment and stick to it like glue. I have found it particularly useful to develop a spreadsheet showing my balances and planned monthly payments to simulate how the repayment will go and calculating when everything will be paid in full. Being able to see the light at the end of the tunnel is invaluable psychologically, and it also will allow you to track your success. While you’re doing this, it’s a great time to also chart out a monthly budget to ensure you’re not going in to more debt ,and to see if there are extra funds that you might be able to apply to your student loans.
4. Dishonest Accounting - When you come in to additional, unexpected sums of money (spending below budget, winning second prize in a beauty contest, etc.), put these “snowflakes” on your debt. It adds up! One of my favourite methods for creating snowflakes is to base my monthly budget on two paycheques per month, even though I’m actually paid bi-weekly. This means that twice a year I get an extra paycheque, which goes straight to debt repayment. As this money was never budgeted, I don’t miss is- but it sure does make a difference on my loan balance.
5. Don’t Neglect Your Savings - Many people will tell you to funnel all available cash to your debt and pay it down as quickly as possible. While I agree with the principle, it is very important to ensure that you’ve got an adequate emergency savings fund in place. It’s true that this approach will cost you more in interest (as there’s no reasonable way that you’re going to earn as much on your savings as you’re spending on your debt), but it gives you a level of security and ensures that you’ll be taken care of in the event of an emergency, such as a job loss. Most student loans are not readvanceable, meaning that if you pay down extra money on the debt, you can’t later take that money back out. Your savings will allow you to meet your basic expenses and minimum debt payments during a period when you’re without income, and this security is well worth the extra interest it will cost you.
6. Don’t Be Afraid To Live- If I were to divert all my funds to my debt repayment I could certainly have my student loans eliminated faster, but at what cost? Good financial management is about balancing a reasonable quality of life with prudent spending and financial responsibility. Save a little bit for occasional splurges and things that you enjoy, and don’t feel bad about doing so.

How do you approach student debt repayment?

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