According to the Institute of College Access & Success, 65% of students who graduate from public or private schools incur student loans. The average amount of debt equals $29,200, which is significant. Back in 1996, the average was sitting at $12,750. Forbes is reporting that the student debt in 2019 was the highest ever, and it adds up to $1.5 trillion nationally.
I am no exception to the student loans. The only difference is I reside in Canada, and our average is a little lower: $28,000 in Canadian Dollars for a Bachelor’s Degree, as per the 2015 research. But the idea remains the same: many people owe the government money for their education. And today, I’m starting my debt-free journey, which I’m planning to conclude in precisely 2 years — in April 2021.
Show Me the Numbers! How Much I Owe
I graduated from a 3-year college program when I was 25 years old. By the time I found employment, my student loans had amounted to almost $50,000 in Canadian dollars — that is roughly $35,700 US dollars. No, the currency exchange doesn’t make it any easier to pay that money back, as our salaries and expenses costs remain the same.
A year later, I made some progress paying off my debt, but a recent health complication, along with a COVID-19 pandemic took a financial toll on me. Here is the break-down of my loans, both governmental and private:
- Government loan: $14,200 at 3.45% variable rate.
- One private banking loan: $6,400 at 3.95% variable rate.
- Second private banking loan: $24,600 at 3.45% variable rate.
Total debt: $45,200.
The list of my assets, in the meantime, looks like this:
- Savings: $2,000 sitting in my chequing account.
- Tax refund, to be received soon: $3,500.
- The emergency fund invested in a Wealthsimple account: $1,400.
- Invested in stocks: $300.
Total assets: $7,200.
The difference between my assets and my liabilities: negative $38,000 — this is the amount to be paid off in the next 2 years. However, I need to remember there will be additional interest added on top of the principal. I used a loan payoff calculator to estimate the interest amount and the monthly payment:
As you can see, I’m on track to incur $1,600 worth of interest, and the monthly payment I’m required to keep up is $1,650.
My Plan to Pay Off the Debt
I need to ensure that my income is enough to systemically reduce my student loans month after month while maintaining a frugal and financially smart lifestyle. The good news is, I’m not a big spender, and I’m doing a decent job at keeping my expenses low.
The list of techniques I will be implementing to ensure I’m debt-free in 2 years is as follows:
- Use 50% of my current monthly income to pay down the debt.
- Allocate the tax returns, yearly bonus and any extra income to make a dent as well.
- Reduce my expenses almost to the minimum, while staying reasonable. I will have a very modest spending budget, but nothing radical.
- Look for additional income opportunities to pay the debt down faster.
- Learn new skills and start a few side hustles to gain extra money.
- Work on my career advancement to ensure I get a raise and a promotion as soon as possible, which will increase my salary as well.
- Stay sane and stress-free despite having a financial burden.
Let’s Run the Numbers!
The calculations above are showing that I need to come up with $39,600 (the debt of $38,000 + the interest of $1,600) in the next 24 months. It dictates the monthly payment of $1,650 — this is simultaneously feasible and difficult for me.
I currently receive a bi-weekly paycheque of $1,450, and one of those cheques each month can go towards paying down my loans. It translates into $17,400 yearly ($1,450 x 12 months). I will be receiving 2 extra paycheques during the year because of how the paydays align, but I have decided not to include them: one can be considered as an emergency expenses fund, and the other can cover extra spending such as holidays expenses, unexpected purchases and maybe a short cheap vacation once per year. Therefore, we are working with $17,400 yearly x 2 years = $34,600 is to be expected from my full-time employment.
The issue is, I don’t have a second job. I need to come up with a plan to cover the remaining $5,000 for 2 years. I was trying to sign up for a food delivery service, but it didn’t work out. Right now, I’m not able to do such a job, as we’re in the middle of a pandemic, and I’m in the high-risk group. Therefore, my biggest challenge is to come up with an income source that will provide an additional $210 monthly for 2 years.
Join Me in This Journey
Today, April 19th, 2020, I am starting this grand plan to become debt-free. Hop on the debt-paying wagon with me! I will be reporting my progress every month, as well as writing about my ideas and thoughts. I will also be sharing my experience on how I ended up incurring this much debt, and what decisions I made along the way. There will be much financial planning and business talk. Good luck to me and to everyone who’s working on debt repayment!
Paying off the student loans is a stepping stone in my long-term plan to retire at 45 that I outlined in another article: