# Making borrowing make sense: one student’s story

## Student debt smarts

KC just got his university acceptance in the mail. He’s not sure how he’s going to pay for it, but he’s going! He considers three possible plans to pay for his four-year program:

Scenario one: Live on campus, borrow to pay tuition

KC figures he can make about \$10,000 each year if he gets a good summer job or works part-time through the school year. That will be enough to cover most of his living costs away from home. But he worries he may still need a Canada Student Loan (CSL) to pay his tuition.

KC estimates he would need to borrow \$18,000 over the four years. He plans to pay the loan back over the usual 10-year period – starting six months after he graduates. With prime at 4.5%, here is what his student loan could cost*:

 Interest option His monthly student loan payment The total he will repay Fixed interest rate \$242.75 (principal and interest) \$27,673.17 (\$18,000 principal + \$9,673.17 interest) Floating interest rate \$218.92 (principal and interest) \$24,956.98 (\$18,000 principal + \$6,956.98 interest)

* Results based on the student loan repayment calculator provided by the National Student Loans Service. Assumes interest rates don’t change over 10 years.

KC’s cost of borrowing: with prime at 4.5%, he could pay \$19,324 or more in interest. Of course, if he chooses a floating interest rate and prime rises, he could pay a lot more interest over 10 years. On the other hand, if prime falls, he could pay less.

Scenario three: Live at home, borrow to pay tuition and buy a car

KC wonders if he would save any money by living at home instead. He would have to buy a car to get to class. But most of his living costs would be lower.

KC does some math and figures that each year his tuition and living costs would be about \$8,500 a year, plus the cost of a car loan, gas, parking and maintenance. KC plans to pay the car loan back over the usual four years. With loan interest at 5%, here is what it would cost to buy a \$10,000 car**:

 His monthly car loan payment The total he will repay \$234.00 (principal and interest) \$11,072 (\$10,000 principal + \$1,072 interest)

** Results based on car loan calculator provided by Canadian Driver. Assumes interest rates don’t change over 4 years.

With this plan, KC estimates his total costs – including his car – would drop from \$14,500 to about \$11,500 a year. So even if he were able to work and make \$10,000 a year, he would still need to borrow about \$6,000 through CSL to cover the gap.

He plans to pay the loan back over the usual 10-year period. With prime at 4.5%, here is what KC’s student loan could cost*:

 Interest option His monthly student loan payment The total he will repay Fixed interest rate \$80.92 (principal and interest) \$9,224.39 (\$6,000 principal + \$3,224.39 interest) Floating interest rate \$72.97 (principal and interest) \$8,318.99 (\$6,000 principal + \$2,318.99 interest)

* Results based on the student loan repayment calculator provided by the National Student Loans Service. Assumes interest rates don’t change over 10 years.

The cost of KC’s debt: even with two loans – his student loan and a car loan – he could pay as little as \$3,500 in total interest over 10 years, based on today’s rates. And since his student loan will be quite small when he graduates, he may be able to pay it back faster and pay even less interest. Of course, if he chooses a floating interest rate and prime rises, he could pay a lot more interest over 10 years. On the other hand, if prime falls, he could pay less.

Conclusion: KC figures he will likely borrow less and pay less interest if he lives at home and buys a car. Still, the difference in cost between scenario one and three could be as small as \$3,000.

So the real question for KC is this: would he rather have a car and save a little money, or live away from home and owe a little more when he graduates? For many students, there’s a real value in the experience of living on their own. For KC, it may make sense to borrow as long as he can keep his student debt low.

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