Financial milestone: consolidation loan fully paid-off!

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Yesterday, I made a lump-sum payment of a little over $ 8 000, effectively putting my consolidation loan to its final resting place.

Beyond the excitement of being finally rid of this loan, I felt a huge relief and also like a weight had been lifted off my shoulders.

until i saw the balance at zero, I hadn’t realized how much this loan was weighing me down

I initially took out this loan in 2011 to consolidate my student loans, a pretty much maxed-out line of credit and a couple of credit cards. At the time, the total amount was about $ 25 000, with almost half of it in student loans.

If you are wondering how I got to be $ 25 000 in debt, please read my story.

Fast forward to 2014, the loan was down to $ 13 000.00. Clearly, consolidating worked for me.

Unfortunately, I had bought a condo in a building that was not in great shape and I found myself faced with a special assessment of $ 6 000.00 for repairs.

Alas, I did not have that money saved. I had bought the property the year before, and my savings were at around $ 2 000.00. So, I went back to the bank and consolidated again.

I was back to being $ 19 000.00 in debt

It was crushing, and not just financially. I started suffering from debt fatigue. I felt like I would never get out of debt. This loan and the payment amount associated with it started becoming a permanent part of my identity.

then, i decided to fight back

After all, I had dug the financial hole I was in, and it was my responsibility to climb out of it.

I decided to throw in an extra $100 per month towards the “beast”, on top of the bi-weekly payments I had to make.

I had calculated I would pay off this loan 9 months ahead of schedule by doing this.

i lucked out with the sale of my condo

Yes, the very same condo that got me further into debt got me out of it. Ironic, I know. I sold the property last year, at over-asking price. Initially, I hadn’t planned on selling just yet. You can find the details here and here.

So why had this loan not been paid off earlier, you are probably wondering. Because I also had other competing priorities, like a lot of people.

I repaid the amount I had taken out of my savings for the deposit on the purchase of my second condo. Then, I bumped up my emergency fund, which was, for me, a necessity.

The lack of emergency fund is what got me into debt in the first place. I don’t want to be in that situation again.

My parents also came to visit me, and yes, I used some of the proceeds to enjoy my time with them. I don’t regret doing that for one bit!

Last but not least, I initially wanted to pay-off my car loan instead, as the amount was slightly lower and I would have owned my car outright.

I debated quite a bit and it took time to reach this decision. I am glad I did. The consolidation loan amount was for a longer period and a higher interest rate. I also had it for too long.

i saved $ 2 000.00 in interests

My bank periodically sent me information about my loan agreement. If I had let this loan run its full course, I would have paid an extra $ 2 000.00.

i now have more options, and it is freeing

It is really liberating not to have that bi-weekly payment above my head anymore. I am now on to tackling my car payment and increasing my retirement savings.

2018 will be the year of becoming debt-free!

Financing post-secondary education

With high-school over and Summer ahead before going back to school, let’s look at alternatives to the dreaded student loans and lines of credit. The Canadian Federation of Students estimates a graduate will owe around $ 27 000 when leaving school. Unfortunately, many parents cannot save to pay for their children’s education and tuition fees are on the rise.

If you don’t have money in an RESP, here are a few suggestions:

–          Research and apply for grants and scholarships. As unbelievable as it sounds, many grants remain unclaimed, as people don’t know about them or don’t bother applying! You think a $ 1 000 grant won’t make a difference? Think again! It is as much that you don’t have to borrow or work for. Grants are also tax-free.

 –          Get a job. This one is a no-brainer.

–          Go to a public university or college. The private sector will charge you 2 to 3 times more.

–          Stay home and local whenever possible. This is a tough one. Many young people are eager to leave their parents and be on their own, just like a lot of parents are eager to see their kids gone. However, true independence goes hand in hand with true financial independence. If you have to take on loans to pay for rent and food or for a move across the country, this is neither independence nor freedom.

–          Study part-time and graduate later. Nothing states you have to be in school for 4 years straight. If stretching your studies by 2 or 3 years means graduating with little or no debt, it is really worth it. In the meantime, you can gain work experience and establish yourself.

The most important is to think beyond your degree. A lot of university grads have unrealistic expectations as to what their professional life is going to look like and the kind of money they will make.

It is very unlikely that you will make a 6-figure salary when landing your first job. It may also take some time before you land that first job. The unemployment rate for people aged 15 to 24 years old is currently at 13.3%.

If you graduate with 40, 50 or 60K of student loans, how do you think you will achieve the independence you so much want? Student debt is neither an obligation, nor the only way.

The ugly truth about Government student loans

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A growing number of high-school graduates turn to government student loans to finance their post-secondary education. Adults returning to school full-time may also elect to do so. I was one of them. There is a number of reasons why:

–   parents haven’t been able to set aside enough money into an RESP

–   not enough personal savings

–    inability to obtain financing from a bank

But most importantly:

–   government student loans are fairly easy to obtain

–  no interest is paid by the borrower during the course of studies

After graduating, a number of people choose to remain at government level when it comes to repaying these loans:

–  repayment can be extended up to 10 years

– greater flexibility in payment amounts

–  repayment assistance in case of difficulties

– 6 month “grace period” after graduating when no payment is required

–  Interests paid on government student loans result in a tax credit

Unfortunately, many people don’t realize there is a very high price-tag to this convenience. The amount of interest paid on government loans will usually far exceed what you would pay at any financial institution for the same amount of money.

The current interest rates for a Federal Govt. student loan are as follow:

–  Fixed: prime -3%- + 5%, i.e. 8%…ouch!

– Floating: prime -3%- + 2.5%, i.e. 5.5%. If the prime rate goes up, so will the overall interest rate.

Let’s assume you have an $ 8 000 loan and choose the fixed-rate. You took advantage of the “grace period” and did not make any payment for 6 months. You also decide to stretch the repayment for the full 10 years. At the end of this period, the total amount repaid will be over $ 12 000 with more than $ 4 000 in interest!

You are not better off with the floating rate. Assuming it doesn’t change for 10 years -very unlikely!- the total amount repaid will be just under $ 11 000 with around $ 2 500 in interest.

The “grace period” is not really one. Interests start accumulating as soon as you are out of school. These are not eligible as a tax credit and they are added to your principal after 6 months. Yep, you will pay interest on interests!

Last but not least, government student loans cannot be included in a bankruptcy or consumer proposal, unless you have been out of school for at least 7 years.

The best course of action may be to try and consolidate all your student loans with a financial institution. If you can’t, aim to repay them within 5 years and do not use the “grace period”. In the first place, you need to make sure that you don’t take more debt than you can handle.