13.2: Manage Personal Debt

Your “personal debt” is how much money you owe to other people, businesses, banks, credit card companies, and other creditors. Do you sometimes wonder where your money goes? Do you worry about how you’ll pay off your student loans? Would you like to buy a new car or even a home someday, and you’re not sure where you’ll get the money? If these questions seem familiar to you, you could benefit from help in managing your personal finances.

Let’s say that you’re 28 and single. You have a good education and a good job—you’re making an annual salary of $60,000 working with a local accounting firm. You have $6,000 in a retirement savings account, and you carry three credit cards. You plan to buy a condo in two or three years, and you want to take your dream trip to the world’s hottest surfing spots within five years. Your only big worry is the fact that you’re $70,000 in debt, due to student loans, your car loan, and credit card debt. In fact, even though you’ve been gainfully employed for a total of six years now, you haven’t been able to make a dent in that $70,000. You can afford the necessities of life and then some, but you’ve occasionally wondered if you’re ever going to have enough income to put something toward that debt.^[1]

Student Loans for College and University Studies

With increased demand for college education, students are willing to take on debt for potential benefits, such as better earning potential and more job opportunities.

Here are a few statistics (2022–2023) about Canadian student loans:^[2]

• The average student loan debt in Canada is approximately $28,000.
• The total amount of student loan debt in Canada is more than $23.5 billion.
• Women make up the majority of Canada’s student loan debt borrowers.
• 20-to-24-year-olds hold the most student loan debt.
• Ontario holds the most student loan debt, followed by Alberta and British Columbia.
• Nova Scotia has the highest tuition costs.

How Long Does It Take to Pay Off $50,000 in Student Loans?

Your potential savings from refinancing will vary based on your loan terms. For example, say you have a $50,000 loan balance with a 6.22% interest rate — the average student loan interest rate for graduate students. On the standard 10-year repayment plan, you’d pay $561 per month and $17,277 in interest over time.

College and university graduates earn significantly more per year than those without these credentials throughout their careers. Statistics Canada provides the following statistics from 2020 within Ontario’s 35-44-year-old population:^[3]

• High school graduates earned $46,960
• College graduates made $56,550
• University graduates with a bachelor’s made $80,100
• University graduates with a master’s made $90,700

Naturally, there are exceptions to these average outcomes. You’ll find some college graduates stocking shelves or serving coffee, and you’ll find college dropouts running multibillion-dollar enterprises. Microsoft co-founder Bill Gates dropped out of college after two years, as did his founding partner, Paul Allen. Generally, a college or university education opens doors to increased job opportunities, increased earning potential, and a path to advancement.

How Can You Get Out of Debt?

A few ways to get out of personal debt include consolidating debt, increasing your income, creating a budget, reducing monthly bills, curbing impulse spending, using a debt repayment strategy, considering credit counselling, using cashback rewards, scaling back on savings temporarily, and creating an emergency fund. Bankruptcy is a final option, but not the best one, as it negatively affects your future credit rating.

Here are some ways to get out of personal debt:

• Create a budget: Adjust your budget and cut back on spending.
• Reduce monthly bills: Choose less costly options.
• Curb impulse spending: Wait a day or two to see if you feel strongly about buying an item before you buy it. Stick to a budget.
• Consolidate debt: Look into consolidating your debt to simplify payments and potentially lower interest rates. Combine multiple debts into one loan or line of credit with a single monthly payment.
• Consider credit counselling: A nonprofit credit counsellor can review your finances and debt and recommend next steps.
• Increase income: Find ways to make extra money, such as taking on a part-time job.
• Use a debt repayment strategy: Simplify your debt repayment schedule and stay accountable.
• Use cashback rewards: Use cashback rewards to pay down your balance.
• Scale back on savings: Temporarily reduce your savings until you’re debt-free.
• Create an emergency fund: Set aside money for emergencies and avoid relying on credit in the future.
• Cut up your credit cards and start living on a cash-only basis. Although credit cards can be an important way to build a credit rating, many people simply lack the financial discipline to handle them well. If you see yourself in that statement, then moving to a pay-as-you-go basis, i.e., cash or debit card only, may be for you. Be honest with yourself; if you can’t handle credit, then don’t use it.
• Pay your most expensive debts (high-interest) first. Pay down the debt with the highest interest charges.

By following these steps, you can begin to regain control of your finances and work toward becoming debt-free.

If you’re unable to get out of debt, you may need to consider bankruptcy. However, bankruptcy is a lengthy process, and it won’t erase all debts, like student loans. It can also ruin your credit rating and make it difficult to get loans or credit in the future.