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Top three dangers of student debt

Student debt smarts

1. Your debt can really add up – and be hard to repay. Paying student loans back can be difficult when you are just starting your career. And, because Canada Student Loans (CSL) sets up its loans so you pay back the interest first, many people with low incomes pay thousands of dollars in interest without paying off any of their principal. For an example, read: What’s it going to cost?

Tip: To cut down on your interest costs, pay your student loans off as fast as you can. Let’s say that you’re supposed to pay $300/month but you are able to make payments of $450/month instead for a few months. That extra $150/month is used to pay down your loan principal, which reduces the loan amount and therefore the total interest charged on your loan.

2. You can have even BIGGER problems if you fail to pay back your loan. It can badly damage your credit rating, so you may have trouble borrowing money next time you need it – say for that first car or home. It can also make it hard to get a job, rent an apartment and get on with your life.

In some cases, you may even have your pay garnisheed – which means the bank will take what you owe first, off the top of your pay. And you know what that can mean: living with your parents because you can’t afford a place of your own.

And if you think that’s frustrating, just wait till you start getting those frequent calls from collection agencies. Collection agencies make money when they collect bad debts, so they don’t give up easily.

What if you just flat out can’t pay it back? There’s a rumour going around that declaring bankruptcy will get you off the hook. But if you’re thinking this is a good plan, think again. Bankruptcy leaves a big black mark on your credit record . . . and it won’t wipe out your student debt until seven years have passed since you were a student.

In other words, the government expects you to make a serious, sustained effort to repay your student loans. Learn more.

3. It can lead to even more (unwise) borrowing. For some students, an education loan is just the first step on a slippery slope. They figure, since they’re going to take on a lot of debt to pay for their studies, what’s another loan for a car? Or why not use that credit card to buy some new clothes, a TV or a vacation? They’re in debt anyway . . .

These students seem to forget the extra cost of buying anything on credit. And, they overlook how long it could take to pay off that debt and have money for other important things – like buying a car, a home, or getting married. Many people are still paying off student loans well into their 20s and even 30s – again, often from the comfort of their parents’ home, because they have too much debt to afford a place of their own.

The truth is, debt adds up fast. Read Natasha’s story in The slippery slope and you’ll see why.

Remember: students loans are just one way to finance your education. There are other options, including co-op work/study programs, grants, and scholarships. Not to mention help from parents or family. Check out all your options before you borrow. To learn more, read: Where to get funding.

Next: Why borrow from the government?

Content provided by InvestorED.ca, an independent non-profit created by the Ontario Securities Commission to help people make effective use of financial information.

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