Pursuing his master's means doubling his debt

Author: Evelyn Kwong

Source: The Toronto Star

Already $34,000 in student debt, Charles, 23, is expecting to add another $30,000 after he's done two more years of school to get his masters in biomedical sciences.

His first goal? Saving enough to pay off all his debt, which he's already started to do as he lives at home with his parents in Markham. When that's all paid off, he hopes to move out and buy his own condo in downtown Toronto.

Currently, Charles makes $68,250 a year working part-time in the pharmaceutical industry. When school starts, that will change. "I will be switching between co-op and school for four-month intervals starting January 2021," he said.

On a typical day, Charles will save money by eating most meals at home and skipping breakfast. "Wake up, coffee, skip breakfast, work from home, lunch at home, work from home again, dinner at home," he explained. Occasionally, he'll get a coffee at Starbucks and meet friends for dinner once or twice a month.

That means right now he has pretty modest spending on the weekend, which includes playing video games at home, hanging out with his parents and only occasionally going out with friends to get bubble tea or food. He also cuts his own hair.

With tens of thousands in debt and expectations to double that debt in two years, how can Charles save to buy his own condo downtown?

We asked him to share his weekly spending to get a snapshot of his finances.

The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Charles's growing debt.

Charles is lucky to be able to work while he is going to university with alternating co-op and school terms. Youth unemployment was 23 per cent in August, about double the average rate we have seen over the past five years. This certainly reinforces the benefit of picking a post-secondary program with a co-op, and considering the employment prospects after completing a degree before selecting it.

It sounds like Charles needs to, or wants to, complete a MBA, so expects some more schooling before his career starts. His student debt could be well over $50,000 by the time he has finished school, so anything he can do to keep his costs modest in the interim will help him tackle that debt when he graduates.

Living with his parents certainly helps, as does cutting his own hair. Given social distancing measures and societal changes from the pandemic, it is a little easier for Charles to live like a student and keep focused on his studies.

Ontario Student Assistance Program (OSAP) loans are interest-free while a student is enrolled in at least 60 per cent of a full-time course load. So, though there may be no immediate urgency to pay down his OSAP loan, that does not mean Charles should ignore it. If he has extra savings from his co-op program, he should consider contributing to a Tax Free Savings Account (TFSA). The resulting investment income will grow tax free. Registered Retirement Savings Plan (RRSP) contributions are not as beneficial given he is only working part-time right now and his income and tax rate are low. RRSP contributions will be more beneficial when he is working full-time and in a higher tax bracket.

Given some of his TFSA savings may be used for his MBA costs or paying down his OSAP loan, I would not take on too much investment risk, opting for a savings account or conservative investments. Future TFSA withdrawals could be used to pay down his OSAP once he graduates and his OSAP debt starts to have interest payable. Rates may be low now, but could be higher in a few years when Charles graduates.

His longer-term goal of a condo in Toronto is not something I would be directly saving for currently. The lower his debt level when he graduates, the sooner he will be able to consider taking on more debt for a home purchase. His OSAP debt will limit his ability to borrow for a condo because the mortgage qualification process considers your existing debts and monthly payments.

Home ownership is a great goal for a young person, but people in their 20s should be careful about jumping the gun. They have grown up hearing their parents and the media talk about how real estate prices are going up so fast. That is not sustainable. Twentysomethings were not alive the last time Canada saw a real estate bubble burst and real estate prices dropped for an extended period. In Toronto, for example, prices began to fall in 1989 and did not hit a bottom until seven years later in 1996. It took 13 years to recover to the 1989 peak, but more importantly, it took 22 years for Toronto real estate to recover on an inflation-adjusted basis (taking into account cost of living increases).

Young people, especially new graduates, may be better off renting initially whether they can afford to buy or not. If you cannot stay put somewhere for at least five years, the transaction costs - land transfer tax, legal fees, real estate commissions, etc. - can easily negate any potential benefit of home ownership. Rent until you have some job and life visibility, and especially rent until you can comfortably afford to buy.

Results: He spent way less. Spending in week 1: $130.74 Spending in week 2: $3.55

Take-aways: "The advice was very helpful to gain insight about what I should be considering in my long-term future," Charles said. Unfortunately, that also means that he has to accept that it will take him longer to buy his own condo and move out.

Are you a millennial living in Toronto or the GTA and need help with saving your money? Be a part of #MillennialMoney and email ekwong@thestar.ca

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This article was written by Evelyn Kwong from The Toronto Star and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.