Every so often, it rears its ugly head: another news story about how students are drowning in debt. 40 per cent of students have taken out student loans and are all too aware of the burden being placed on their shoulders. But as it turns out, student loans are only part of the debt problem. So what is the other side of this financial terror?
It’s consumer debt, generated on student credit cards and lines of credit. Students in Alberta can owe as much as $25,000 by the end of a four-year program, on top of an average $23,000 in plain old student loans. But even a small amount of credit card debt can be damaging. What sets student credit card plans and lines of credit them apart from students loans is that they’re far less forgiving, making us pay more than we should.
Every major Canadian bank, from Bank of Montreal to CIBC, has some kind of student line of credit or credit card plan. These plans appear inexpensive at first; they have no annual fee, low interest, and high limits — especially the credit lines. The rules tend to be quite lenient: most plans only require that you pay off your interest each month to remain in good standing. Even better, after you graduate, there’s usually a 12-to-24 month grace period before you have to start paying back the debt.
But here’s the problem: plans like these incentivize you to avoid paying off your actual debt, giving bank extra money instead. Paying off just the interest seems like a good idea if you’re financially stressed (which, if you’re a student, is probably all the time), but it’s a trap. Interest is just the fee the bank charges when you don’t pay your debt on time — it doesn’t resolve the principal debt at all. As long as the main debt isn’t paid off, the bank can keep making you pay thousands of dollars in fees. At least with student loans, you can apply for forgiveness and the interest is usually deferred. If you’re unable to pay off credit card debt, the only way to get out of it is to declare bankruptcy, which will torpedo your credit score.
The second major issue is the grace period. It’s based on the assumption that a degree will lead to a well-paying job. But that’s a dangerous assumption to make: more than 25 per cent of 15-to-24-year-olds are working in jobs below their skill level, or don’t have a job at all. Not only that, the grace period typically ends when a borrower is in their mid-to-late twenties when people really begin their adult lives. Moving out, buying a car, and other markers of financial independence come with large costs and possibly even more debt. The last thing you want is to be trying to get a car loan while being $40,000 in the red.
Why are student lines of credit and credit cards set up this way? Because we’re a bank’s ideal customers: we’re young, which means we have a long time to repay debt (i.e. shovel our wages into the bottomless pit that is minimum payments). If we can’t, there’s a significant chance that our parents will bail us out, especially if they cosigned the loan (then they have to).
Most of us also have no idea what the fuck we’re doing financially. Less than half of students keep a budget. About a third of students pay monthly banking fees, but only 62 per cent of that third knows how much those fees cost. Almost 1 in 4 don’t even know how much goes in and out of their bank accounts every month. We have a bigger problem than the sheer amount of debt we’ve taken on: we have no idea how to deal with it, which banks love because all those interest payments line their pockets like mad.
Not all of this is our fault — today’s market demands credentials if you want to be paid more than peanuts, and being able to eat is nice. But there are things we can do to help ourselves, and one of those things is being financially literate. If we don’t plan how we’re going to pay our debts, we’re giving banks the go-ahead to plan for us, and we probably won’t like what they come up with.