Today I have a reader question from Matthew in Toronto. Matthew is 32 and has $43,000 in student loan debt at 5.20%. His monthly payments are $485 per month, which is a stretch for him. He currently grosses $37,500 per year at his full-time job and wants to know how he can pay off his debt quicker. He’s (rightly) concerned that being tied to his student loan debt for the next ten years is going to impact his ability to save for retirement, and he wants to get rid of the debt as soon as possible.
Step 1: Looking For Grants and Government Programs
The first step to paying off debt is Googling around to see if there are any government programs or grants available to reduce student loan debt. When doing this, don’t look for programs that reduce your monthly payment. This doesn’t actually help you get out of debt sooner, it just reduces the burden of your student loans if you are in a financial crisis. In fact, those programs usually leave you in debt longer because the lower monthly payments come with a longer loan term, which means you’ll end up paying more interest.
Instead, look for programs that reduce the loan principal.
Matthew was particularly interested in how I was able to wipe out $16,000 of my debt in minutes by using the Timely Completion Benefit. Unfortunately that benefit was only offered to graduates in New Brunswick. Since Matthew is located in Ontario, he doesn’t qualify for that benefit.
I don’t know what Matthew does, but if he’s a nurse he could qualify for Canada Student Loan Forgiveness for Family Doctors and Nurses, which could help him reduce his student loan debt by up to $20,000 if he’s willing to work in a rural area for four years. As a bonus this would also decrease his living expenses which would allow him to boost his payments.
There are also about 24 programs available through Ontario Student Assistance. I don’t know Matthew’s situation, but it’s possible he qualifies for one of these grants. He mentioned in his email that he already took advantage of the Ontario Student Opportunity Grant but it’s possible there are others he qualifies for.
Step 2: Decreasing Expenses
Beyond grants and bursaries, there is a lot Matthew can do to pay off his debt earlier. At the very least, he can pay it off in five years instead of ten years by increasing his monthly payments to $815.41 from what he’s paying now ($485). That’s a difference of just $330 per month. There are a ton of ways that Matthew could find $330 per month in his budget, including:
- Moving to a cheaper city (Toronto is expensive!)
- Selling his car and taking public transit or biking to work
- Moving to a cheaper apartment with roommates
- Stop eating out
- Stop buying alcohol
- Give up cable and home phone
- Stop going to the gym and work out at home
- Learn to cut his own hair
These are just a few suggestions on how to frugalize your spending habits, I know my readers could suggest about fifty more. If those suggestions don’t free up $330 in his budget, he could also try and raise his income.
Step 3: Increasing Income
Paying off $43,000 debt on an income of $37,500 is going to be hard. I know this because that’s almost exactly where I started. My first job out of university earned me $38,000 per year and I owed $38,000 in student loans and a car loan. There just wasn’t enough money to pay rent and groceries and pay my debt off quickly. So after reducing my spending as much as possible, I started looking for ways to increase my income.
Here are some tried and true ways to increase your income:
- Ask for a raise (Matthew did say this was unlikely, but you never know)
- Learn new skills to justify asking for a raise
- Volunteer for overtime (if that’s an option, it may not be)
- Get a second job, either part-time or freelancing
Ideally you would combine step two and step three, as I did. If Matthew has major success with this step (say he brings in an extra $500 per month), he could also consider using some of that money to start an emergency fund and contribute to his retirement account. I didn’t do that because I was 21 when I was paying off my student loans, but Matthew is 32, and time is of the essence when it comes to benefiting from compound interest.
Matthew specifically told me in his email that he wants to reduce his student loan debt loan without taking years to pay it off or getting a second job, but unfortunately, that may not be possible if he doesn’t qualify for any of the student loan debt reduction grants. Based on the numbers, either you make extra payments, which will require more money, or you don’t, and resign yourself to the fact that you’ll be in debt and contributing much to retirement for a long, long time.
Step 4: Making Lump Sum Payments
Matthew could pay off his debt even faster by making lump sum payments. This could be windfall money like an inheritance, or his income tax return. For example, if Matthew has a yearly income tax return of $1,200, and every year he applies the whole thing to his student loans along with the extra $330 payment per month, he would be debt free in four years nad four months (that’s eight months earlier than if he was making just the extra payments and six years and eight months earlier than he if was making minimum payments).
Speaking of income tax returns, there is one benefit to having student loans: you earn a 15% tax credit on the interest paid. You can also claim a full-time education credit in the amount of $400 for each whole or part month in the year in which you were enrolled in a qualifying program at a designated school, and a non-refundable textbook tax credit of $65 for each month you were enrolled in a course that entitles you to a full-time education tax credit. You can find out more about that at CanLearn.ca.
Using this plan, Matthew should be able to pay off his debt in four years and four months without student loan forgiveness. At that point, he’ll be 36, and it’ll be time to ramp up his retirement savings. Fortunately, the discipline he’ll develop from paying large amounts of cash toward his debt will help him build up his retirement fund equally speedily.
What do you think folks? Does this plan sound doable? Do you have any advice for Matthew?