Paying off student loans

Article: Paying off student loans (PDF)

Objectives

• To help students plan financing postsecondary education.
• To understand how loan repayments work.

Method

1. Acquiring postsecondary education involves many costs, not just tuition expenses. Have the students discuss what expenses they may incur while attending a university or college during an 8-month study period.
2. Have the students build a spreadsheet, listing the categories of expenses in the left hand column. In the second column estimate the costs they might incur in each expense category if they were to live at home while attending university or college. In the third column estimate what these costs would be if they lived away from home. Add up these columns to estimate the total costs of an 8-month study period. Various sources can be used to estimate expenses. Your local newspaper may have ads for student rooms or apartments for rent, many universities have websites indicating tuition fees, residence fees and meal plan costs, or the school library or guidance office may have university or college calendars indicating the costs of attending their institution. Parents may help students estimate the cost of food.
3. Now, have the students estimate the resources they have available to pay for their education, e.g., savings from summer jobs, earnings from part-time jobs while studying or parental support. Itemize the sources of income and their amounts in another part of the spreadsheet.
4. Calculate the difference between total expenses and total resources available for education. If costs exceed resources, the student may need to reassess the costs, or find additional sources of financial aid. Estimate how much the student may need to borrow over the duration of the educational program. The Canada Student Loans Program and provincial student loans programs may provide funding. Check out Human Resources Development Canada's website to find the terms and conditions of eligibility for Canada Student Loans.
5. After completing studies, students must begin repaying government student loans before the end of the 7th month after graduation. Canada Student Loans carries a maximum fixed interest rate of the prime rate + 5% or a maximum floating rate of the prime rate + 2.5%. Provincial student loans have different interest rates varying from province to province. Calculate monthly payments if the interest rate was the prime rate +2.5% and loans were repaid over a 5-year period. Recalculate monthly payments with a 10-year repayment period. (The prime interest rate can be found in your daily newspaper). The following formula can be used or students may wish to refer to loan calculators available at many financial institutions' websites.

   
   

   where P =	principal
   N =	number of months over which the loan is amortized
   J =	monthly interest rate in decimal form (i.e., I/(12*100)). For example, an annual interest rate of I= 10% means that J = 10/1200 = 0.0083333.

   
   
   Example of calculating monthly loan repayments
   
   What would the monthly payments be to repay a loan of $30,000 at 10% interest over 15 years.
   
   

   Student loan principal	P = $30,000
   Annual interest rate	I = 10%
   Repayment period	=  15 years. Number of repayment periods N = 15 years*12 months = 180

   
   
   
   
   Over 15 years, 180 monthly payments would be made amounting to just over $58,000 in payments. This means that $28,000 in interest was paid to repay the $30,000 loan.
6. Have the students discuss how they would handle making repayments and what hardships they may experience.

Using other resources

• Visit Human Resources Development Canada's website (http://www.hrdc-drhc.gc.ca/hrib/cslp/common/index.shtml) to get an estimate of the amount of Canada student loans you may be eligible to receive using the Student Need Assessment Software (SNAS).

Please e-mail comments or examples of how you used this exercise in your class.