Hopefully your child doesn’t need to borrow to get through school. Unfortunately, many will. The average student in Canada graduates owing $29,000 in student loans, according to Statistics Canada. That statistic can sound scary. It’s enough to buy a car, or a good start on a down payment towards a first home. It can be difficult for today’s 18-year-old to predict what starting out their adult life will feel like with so much debt. Many will have to pay back these debts in the face of increased costs of living, and out-of-reach home prices. So take time each year to sit down with your child in postsecondary school, and talk about their finances.
Here are some ways to help them reduce the impact of any debt they may need to take on.
Evaluate the options each year
Before the first year, and at the end of every postsecondary year, take the time to check in with your child. Are they still feeling confident about their chosen career path? Is there any chance they need to stay in school longer to make up for failed credits? What will the cost of that be? Have they revisited the earning potential of their career options this year? The answers to questions like these should help them decide if they want to make any changes to their program, or even change schools.
For example, if your child has been away at school for their first two years, the actual cost of their education is likely more than double that of going to a university in commuting distance (if that’s an option). Making sure they understand the impact of going away for school will have on their total debt at graduation is important. There are many people in the workforce that feel that some of the costs of their education were a waste.
Costs can drastically increase if they spend too long in the wrong program, or insist on going away. Checking in regularly is an important way to keep your child from falling victim to the sunk-cost fallacy where they are prone to keep investing in the same path of education even if the outcome won’t actually benefit them. Help your child understand that making smart changes is a good thing, and sticking to a plan that doesn’t line up with current goals isn’t virtuous.
There are many dorms full of first-year students who live less than 30 minutes for the experience. If you’ve saved enough to fund residence and food on top of tuition, no worries. But that’s a super expensive experience if it’s on borrowed funds. And some students may make this decision without knowing the long-term consequences, so be sure to have this conversation with your child.
Finally, even though federal student loans are interest free, and many provincial loans are too ( some have conditions), that doesn’t mean it’s free money. Remember that newly working young adults will still have to pay the principal back, typically over no more than 9.5 years. That means that average student debt load would cost just over $250/mo if stretched to the typical max amortization.
That might not seem like much. But when the average bachelor's degree grad earns $64,000/yr gross, which means if they keep about $3,500 after taxes, that loan payment is nearly 7% of their income. In their early career years, that $250/mo can be a lot heavier than it looks. So helping our children reduce how much debt they take on to get their education has a profound effect on the financial trajectory of their early working adulthood.
Keep loan funds in a separate account
If your postsecondary student must borrow, encourage them to keep all lump sums from student loans in a separate account so it’s not attached to their debit card, where it could accidentally leak out on day-to-day expenses. We like to think of this as the lump sum account. This is probably the most important tip in this whole post. Students are usually able to get no-fee bank accounts, so having separate accounts shouldn’t create a new cost. Only as tuition, residence fees, and books are due should the appropriate funds move out of this account.
If your child is partially living off their student loan to pay rent, and other living expenses that require a more regular stream of funds, set up regular automated deposits of the required amount into their spending account.
Maximize scholarship opportunities every year
Sometimes after the first year, even eager scholarship applicants back off. There are often less scholarship options for upper-year students, but there are still plenty out there. We recommend that parents require their children show them proof of scholarship research and applications contingent on RESP funds, or other parental financial support. Any scholarships received should also live in their own account, or could live with the student loan funds in the lump sum account.
Keep summer or part-time wages in a separate account
If your student is lucky enough to have a summer job, or part-time job through the school year, discuss how much of those wages they expect to spend on day-to-day items, and how much will go to savings. The student can have their deposits from payroll split between their spending and lump sum account directly to keep it easy and automated. Keeping more of the funds they plan to save to cover educational costs ready and waiting can drastically reduce loan balances at graduation. This also helps them develop more keen spending skills because they don’t have so much cash sitting in their bank account on a regular basis.
Set up a transfer to a student spending account
Of course, postsecondary students need access to money they can spend on day-to-day items to have some fun. So having your student use their existing account as their spending account and setting up transfers as needed from their lump sum account(s) drastically reduces the risk of them taking on more student debt than they have to.
Map out each year
While we’re not a fan of budgets over here at CacheFlo, things with a beginning and end, like a school year, is a good place to use that strategy. A regular spreadsheet will help your student map out how their finances should go throughout the year. Include educational costs, living expenses and any costs related to going home on breaks. Enter all of the resources they have available to them for that year. Include any unused loan amounts, new loan amounts, parental contributions, RESP withdrawals, income from summer and part-time work estimates. Make a new tab each year, and check in with them to make sure they are on track every month.
In most cases, beyond parental income to determine eligible loan maximums, provincial or federal student loans are the responsibility of the borrowing student. How your student decides to manage these funds will fall at their feet. But these young adults are often not ready to strategize how to handle this much money on their own. And if they do, many will experience expensive consequences that they never learned how to predict.
You can’t force your child to collaborate with you on how they manage the funds, but you should regularly offer to work with them and keep general finances in your conversations. Ultimately, working with your postsecondary student on how they’ll manage their student loans is a fantastic teaching opportunity for parents and their young adults. We don’t build great financial skills in a vacuum. Kids need support as they learn how to take on the responsibilities of student loans along with other financial milestones.
About CacheFlo
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.
About the Real Life Money program
An annual, digital, behaviour-based program that teaches employees everything they need to know and do to become financially capable. Our proven financial wellness program that combines online workshops, microlearning, and a powerful app called Winton that puts financial capability, confidence and control into the hands of every employee. Learn more.
