By Scott Hannah
Q: My older sister graduated university last year with a huge student loan. My parents figured she’d never graduate and it’s because of her that I heard that student loans have lifetime maximums. I will be starting my second year at college in the fall, hopefully transferring to university a year or so after that. Right now I’m researching options for how to pay for my education without getting into so much debt, and I’m wondering if student loans are even worth it. What do you think? ~Kelli
A: Education is expensive and what you do with your education will determine whether a loan is worth it or not. If you go to school because you don’t know what else to do, or you’re a professional student sticking around for more classes than you need, non-repayable sources of funding (e.g. income from employment, scholarships, grants or bursaries) to pay for your schooling or graduate work are the better bet for protecting your future.
If you’ve got a realistic shot at getting a job in your chosen field when you’re done college, university or trade school and can start paying back a student loan sooner than later, then a modest amount of repayable funding (aka loans) based on your anticipated income level is likely worth it. But not all student loans are created equal. True government student loans, both federal and provincial, come with income tax benefits that bank and family loans do not.
However, whether student loans are worth it or not brings up the debate about good debt versus bad debt. Student loans typically fall towards the good debt side of the debate, with the caveat that you definitely can have too much of a good thing.
What is good debt?
Good debt is debt we take on to further ourselves, to invest in our future, to build wealth in some way, to create value. You could say that borrowing money to invest in your education meets all of these goals, until you borrow so much that the bad outweighs the good.
What is bad debt?
As you might assume, bad debt is debt that we take on for things that decrease or lose value. Credit cards are a good example; they charge high interest rates and the things we typically buy with our credit cards lose value quickly. Car loans are usually considered bad debt too because a vehicle depreciates and loses its value quickly.
Can debt be good and bad at the same time?
The line between good and bad debt can blur. For instance, a modest car loan to top up a solid down payment so that you can buy a quality used vehicle and save money on fuel, maintenance and repairs (versus what you are currently paying on an older vehicle), one might argue that that car loan is good debt because it improves your current situation.
When is debt for education bad?
When it comes to taking on debt to pay for education, the pendulum swings from good to bad when we take on more than we can reasonably pay off with the income we anticipate earning in our chosen career or job. It is well worth the effort to use a student loan repayment calculator to figure out your estimated monthly payment amount against your anticipated monthly income, before you commit to taking on a student loan.
When does it make sense to get a student loan?
A student loan might make the difference between getting an education or not, so there are times when it makes sense to get a loan, like if you have:
- a budget and have already made frugal spending decisions with some of your biggest living expenses, e.g. rent, groceries and transportation
- an educational plan so that you know how long you’ll be studying and what your income will be when you’re done school
- some money to put towards your education, either from savings, from working full-time when not in school, or from part time employment while studying
When does it not make sense to get a student loan?
Budgeting with a lump sum of money can be hard for anyone, let alone for a young adult who doesn’t have much budgeting experience. It can be very tempting to see the money as “free cash” because federal and provincial student loans have no repayment expectations while you’re still in school, and a six-month grace period between the end of school and when repayment begins. However, nothing could be further from the truth. One of the worst reasons to get a student loan is because you feel poor and want some money to pay for living expenses, when you haven’t also explored your other options.
Other times when it doesn’t make sense to get a student loan is when you don’t have a plan for your education, you don’t know what your income prospects will be when you’re done your program, you don’t have a budget to guide your spending choices, and you haven’t explored your non-repayable funding options.
The bottom line on if student loans are worth it or not
Average student debt load in Canada is significant and graduates are finding it harder and harder to repay what they borrowed for student loans and lifestyle expenses while they were studying. Getting a student loan to supplement your non-repayable funding options can help ease the stress of trying to balance the demands of school, life and work. One strategy to keep your student loan money strictly for emergencies is to set the funds aside in a separate savings account for just in case. If you get to the end of your studies and find that you didn’t need all the money, you’ve got a head start repaying what you borrowed, and a head start on the rest of your life and goals.
- Should I Save for My Future or Pay Off My Student Loans?
- 7 Financial Mistakes to Avoid at University
- How to Take Control of Your Finances While at College