Follow the rule of tens to keep a cap on student debt

Postsecondary education isn’t cheap. And if you’re not careful, you can accumulate a lot of student debt. Just ask Lisa S. Palmer, who is indebted to her school, Hunter College in New York, for US$94,000. These costs relate to her dorm room at the school. You see, Ms. Palmer discontinued her classes in 2016 but has refused to move out of her residence, and hasn’t paid all of her residence fees either. She’s received eviction notices, but won’t budge, and the school has filed a lawsuit.

Having paid residence fees for my own children recently, I can confirm that there are cheaper places to live than the university dorm. And avoiding too much debt as a student should probably start with moving out of the student residence if you’re not taking classes.

Racking up debt as part of the postsecondary experience is sometimes inevitable, but keep it within reason. Follow what I call the Rule of Tens when it comes to borrowing for an education. Let me explain.

The story

A woman called me not long ago to ask a question. She wondered how she could pay down her student loans faster, and claim tax relief for the interest on the debt. What came to light was that she owed about $100,000 in loans related to her education. “Are you working right now?” I asked. “Yes, I have a job as an accounting clerk at a small company,” she said. “And how much do you earn?” I queried. “I make $63,000 annually,” she replied.

Based on my math, she’s using about 25 per cent of her take-home pay (about $4,270 monthly) to pay back her student loans (loan payments are $1,033 monthly). These loan payments are way too high for her level of income, considering she also has rent, food and other living costs to worry about.

Here’s the bottom line: She borrowed too much in the pursuit of her education. She studied political science for four years at a well-known university, then pursued her masters for an additional year. I have nothing against political science. I have friends who pursued that same course of study because they love it. The difference? They didn’t borrow $100,000 in the process.

The rule

Here’s the general rule: For every $10,000 in student debt, you should be able to earn $10,000 over a base of $10,000 annually to be able to pay off that debt in 10 years. For example, if you graduate with $50,000 of debt, you should be able to earn $50,000 over a base of $10,000, for a total of $60,000 annually in order to pay off that debt over 10 years. This rule will generally keep your debt payments to between 10 per cent and 15 per cent of your take-home pay – which is manageable.

The strategies

Following the Rule of Tens when it comes to borrowing for an education makes good sense. But here are some other strategies to consider, to reduce the impact that borrowing for an education can have.

Earn more after graduation. I encouraged the woman I spoke with to look for a higher-paying job. She’s highly educated and not working in the field she’s qualified for. Pursue the highest income you can after graduation.

Work more during school. A student can often hold down a job during the school year for up to 15 hours a week and still manage to study. Further, earning as much as possible during the summer months is important to taking on less student debt.

Study part-time. If you’re having trouble paying for school full-time, consider studying part-time if you can. This will allow you to work more and borrow less. So what if it takes you longer to graduate? It beats burying yourself in debt you’ll struggle to repay.

Create a budget. What are your financial resources? Take into account how much you earn, plus your savings, plus how much you should borrow (thinking about the Rule of Tens), then let that determine how much you can spend on your education. And don’t spend your loan proceeds on a trip to Mexico.

Live lean. Most students in their late teens and early 20s don’t have many financial responsibilities, so take advantage of this time in your life. Live frugally. Get by without a car if you can.

Pursue scholarships. Rather than borrowing all you can, look for free money, too. Check out these websites: scholarshipscanada.com, studentawards.com and canada.ca (do a search for “student aid”).

Claim a tax credit. If you do have qualifying student debt (under the Canada Student Loans Act, Canada Student Financial Assistance Act or Apprentice Loans Act), don’t forget to claim a tax credit on Line 319 of your tax return for the interest paid.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.