Students: How to budget, manage debt

TORONTO – As students prepare to make the leap from high school to college or university, many may find themselves confronting some tough, new lessons outside the classroom.

“Kids coming out of high school have very low financial literacy,” says Kurt Rosentreter, a financial adviser at Manulife Securities. “Very few understand money.”

That can lead to major challenges down the road and exacerbate the debt burdens they will have to shoulder upon graduation, Rosentreter says.

“Coming out of school after four or five years with $100,000 in debt is one of the worst things that could happen to you,” Rosentreter says. “It’s a burden on your back that will limit your ability to get debt for future purposes, like borrowing to buy a home or a car.”

Experts say budgeting and using debt prudently are essential to ensuring students’ future financial well-being.

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Budgeting

Lana Robinson, executive director of CIBC Wealth Advisory Services, recommends that students create a monthly and a weekly budget to track their sources of income and their expenditures.

Income sources can include student loans, bursaries, a line of credit, loans from family members and income from part-time or summer jobs.

Expenses can be broken down into two categories, says Robinson. Non-discretionary costs include non-negotiable items like rent, tuition and transportation.

Determining how much to spend on discretionary items requires making decisions, such as how much to shell out for cellphone coverage and whether to eat out or cook at home.

However, it isn’t enough to simply create a budget, says Robinson — for many people, the tricky part is sticking to it.

“It takes discipline,” Robinson says.

For students who receive student loans and other income in large, lump sums, Robinson recommends keeping that money in a separate savings account and transferring portions of it into chequing on a monthly basis. That can help students ensure that they don’t spend more than their monthly allotment.

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Managing debt

Learning how to use debt wisely is another important skill for students to grasp, says Rosentreter. It’s all too easy to run into trouble by treating a credit card “like it’s candy,” he says.

“I’ve seen kids who are 25 years old who are declaring bankruptcy because they’ve rammed up credit cards,” Rosentreter says.

There are several kinds of debt that students can use to pay their way through school, and Rosentreter recommends sticking to those with low interest rates that allow more time for repayment.

Government student loans are usually the best option in this regard, as they typically don’t require students to pay them back until after graduation. However, some students may not be able to secure as much funding through that avenue as they require — particularly if their parents are in too high of an income bracket.

A student line of credit from a bank is a good alternative, while credit cards — which have the highest interest rates and need to be paid down quickly — are the worst of the available options, Rosentreter says.

If possible, students should try to borrow money from parents, grandparents or aunts and uncles, as family members are likely to provide loans on friendly terms — for example, not requiring the student to pay back the money until he or she has landed a job.

Of course, students don’t have to wait until graduation to start paying down their debt, Robinson says.

“If you have extra money now, for example if you’re working in the summer and maybe you’ve made a little more than you need, you could look at paying some of it down,” Robinson suggests.

“Reducing the debt is definitely a good strategy if it’s within your means to do it.”