By: Joel Schlesinger
Winnepeg Free Press
Debra recently finished university but from a financial standpoint, university hasn’t finished with Debra.
Having graduated earlier this year, completing her masters degree, her six-year journey cost about $25,000, she says.
Fortunately, she landed a job with the provincial government soon after graduating and earns about $42,000 a year.
Now, it’s just a matter of chipping away at her student debt, including $13,000 she owes on a student line of credit at four per cent interest.
"I have one year from my graduation to pay this off as much as possible. Once that year is up, my interest rate will increase annually," she says, adding the credit line is at its limit.
But she also owes about $6,000 on a credit card charging 12 per cent with a limit of $8,000.
"My focus has always been to pay the credit card first or at least pay it down more than the other, because it has the higher interest rate," she says. "I just pay the minimum on the student debt right now."
In her late 20s, Debra says she has yet to claim the Manitoba tuition fee income tax rebate that would reimburse up to 60 per cent of her tuition costs.
But she says she knows it will play a big part in helping achieve her goals for the next three to five years — those being to pay off her debt and buy a home.
"I want to build up savings and pay down debt at the same time," she says. "I heard that when you want to get a mortgage that it’s good to show you can balance both at the same time."
MaryAnn Kokan-Nyhof, a certified financial planner with MGI Financial, says Debra is on the right track. But she could do a few things to improve her situation. First, she can make herself more mortgage-lender friendly.
Kokan-Nyhof says she consulted a mortgage lending specialist, Karen Beckingham at Dominion Lending Centres, who provided a few tips on what lenders look for in a good candidate for a mortgage.
Debra is correct in assuming she should try to pay down debt and save at the same time. This isn’t just to maximize the efficiency of her money. Rather, it’s to prove to a mortgage lender she is able to juggle both.
"And obviously, she’s going to need some savings for a down payment," says Kokan-Nyhof, adding Debra will likely need about $15,000 to $20,000 to qualify for a mortgage in the Winnipeg market.
Equally as important, however, is that Debra needs to get her student line of credit debt paid down from the maximum. Advising her to attack the lower-interest debt first might seem counterintuitive, but it makes sense from a lender’s perspective, Kokan-Nyhof says.
"Most people would think that you pay down the debt with the highest interest rate, and that is true, except for the fact that her line of credit is at its maximum and that is not good for her beacon score."
Debra should aim to at least reduce her line of credit to 80 per cent of its limit. That’s a decrease of about $2,600 from what she owes now.
She is already paying $200 a month on her credit card, so she could divert those payments to the student line. She’d have the line of credit down to about 80 per cent of the limit in about a year.
But Kokan-Nyhof says if Debra’s expenses are accurate, she should have more than enough money in her budget to pay down her line of credit and her credit card at the same time, all while stashing a little away into savings for a down payment.
Debra’s monthly expenses, excluding debts, are $1,071. (She has a roommate who shares in costs.) And she earns $2,299 net a month.
She could cover her expenses and pay $433 on both debts every month, and she would still have $392 a month left over, which could be deposited in a high-interest tax-free savings account (TFSA) to save for a down payment.
The catch is to control her spending.
Debra has flexibility in her budget and she can adjust how much she pays on her debt — or saves — when money is tight. But she must never let her debts hit the maximum, and she always should pay more than the minimum payment.
"Paying only the minimum also negatively affects her credit score," Kokan-Nyhof says. "Even paying $1 more than the minimum apparently makes a huge difference."
Fortunately, Debra has an ace in the hole — the tuition tax rebate.
The problem is it’s going to take awhile before she can reap its benefits. The rebate can only be used to reduce her Manitoba tax payable.
Because she recently started her job and has been a student most of the year, she likely hasn’t paid much Manitoba tax in 2011 — if any, once she files and gets a refund. It’s likely Debra will be getting a tax refund this spring, which she can put into savings or against her debt, but little of it will likely come as a result of the tuition tax credit.
It won’t be until she files her 2012 taxes in 2013 that she will see a substantial refund from the rebate. She should keep in mind only her tuition is eligible for the rebate, not other costs associated with going to school, such as books.
"Did she really pay $25,000 in tuition?" Kokan-Nyhof says, adding Debra will need to verify that figure when making a claim. If she did, she’s eligible for $15,000 in rebates — or 60 per cent of $25,000.
The maximum amount she could receive each year would be the lesser of one of the following: 10 per cent of the total tuition, Manitoba tax payable or $2,500. Based on her income, Debra will likely see a $2,200 refund from the rebate for 2012. And it’s likely she has paid enough tuition to receive enough of a rebate over time to pay off her student line of credit and some of her credit card debt.
Yet it’s likely that by the time she can claim the entire amount, which could take a few years, she will have already reached her goals.
If she can pay $866 a month on debts while saving $367, she will have her credit card paid off in 15 months and get her line of credit below 80 per cent of its limit. She will also have $5,880. Then the $433 she had been paying on her credit card could also go toward savings.
Well within five years, she should have saved between $15,000 and $20,000 for her down payment while paying off most, if not all, of her debt when the tuition rebate is factored into the equation.
Yet how fast she accomplishes her goals depends on how she manages her spending and expenses, Kokan-Nyhof says.
"But she’s got all the right ideas; now she just has to execute."
Annually: $42,744 ($2,299 a month net)
Monthly: $1,071 (excludes debt payments)
Line of credit: $13,000 at four per cent interest; at limit
Credit card: $6,000 at 12 per cent interest; $8,000 limit
Savings account: $1,000