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Buried in student debt

Couple keeps up with expenses while paying off education bill

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Young couple's surplus isn't substantial enough to tackle their debt load. They'll have to find ways to increase income or risk paying down debts until they die.


Young couple's surplus isn't substantial enough to tackle their debt load. They'll have to find ways to increase income or risk paying down debts until they die. Photo Store

Dirk and Betsy are living paycheque to paycheque on an income of more than $125,000 a year.

"Every paycheque I'm just so stressed," says Betsy, a health professional in her early 30s. "I'm happy if I've got $50 left until next payday."

The couple's source of financial angst is Betsy's student debt. She owes more than $250,000 to various lenders, including the government.

"I had to go to school in the States to get my doctorate," she says. "I expect to be paying these loans until I die."

In addition to the student loans, they also owe $185,000 on a mortgage on a home valued at a little more than $200,000.

They've been cutting back on costs where they can, and they recently refinanced much of the debt after her parents co-signed a consolidation loan.

Betsy earns about $78,000 a year before taxes and deductions while Dirk, in his 40s, works in construction, earning about $48,000.

Betsy only recently returned to work full-time after maternity leave for their first child, and both expect to earn more money in the future.

For the time being, however, they're having a difficult time juggling debt payments and living expenses.

"We're supposed to be saving but when you don't have a pot to piss in, you don't know what to do," she says. "It's frustrating because we're trying to get ahead, but we can't because of all this pending debt."

Debt counsellor Sally Massey-Wiebe says Dirk's and Betsy's basic expenses aren't "extravagant," which makes finding additional room in their budget to pay down debt difficult.

"If anything, perhaps they are not even inclusive enough in some areas of expenses, such as costs of haircuts or other personal needs like toiletries and household products," says the debt expert with Community Financial Counselling Services in Winnipeg.

Since their numbers may not be as accurate as indicated, the couple needs to track their expenses consistently to get a better handle on their costs of living. To start, their best plan of action is to work backward, looking at credit card and bank statements for the last few months to fill in the blanks on their expenses.

As is, their numbers indicate they have a surplus every month.

"Out of their combined average income of $7,047 per month -- taken as 26 biweekly pay periods divided by 12 months -- they are paying an average of $2,638 a month in debt payments not including their mortgage," she says. "The living-cost averages provided are $3,941, so the end result is a surplus of $468 per month after all debt payments."

If this surplus does exist, Dirk and Betsy need to use it to create an emergency fund first, so they're not relying on high-interest credit cards to pay for unexpected costs such as home and car repairs.

"The oft-stated suggestion of three to six months' salary for emergencies is just not doable at this point." A realistic figure for them is at least one to two months of mortgage and loan payments set aside. This is a must-do measure because if they miss payments on some debts, both they and the co-signing parents risk losing their homes, she says.

Once the couple has built up a cushion, the surplus should be used to pay off debt. But this will only have a modest impact on their total debt load, so they also need to cut costs and increase the cash flow.

"Certainly, they could cut out every penny of discretionary spending."

But this would likely be as unsustainable as it is unpleasant.

A better plan is to create a budget that allows for modest discretionary spending and aims for marginal reductions for all expenses when possible.

"Plan spending in advance based on income and average living costs and stick with the program," she says. "This may mean creating a structure as simple as envelopes for each expense category and making deliberate choices about how much they'll spend in each category without dipping into one category to cover costs in another."

As previously stated, cutting costs will be challenging because their living expenses are already low. It's more likely increasing their income will be the best means to tackle their debt in a substantive way.

Wage increases, however, could be a couple of years away. In the meantime, they should pick up part-time work and apply those earnings against debt. In addition, they may be able to find tax savings to further reduce what they owe.

Massey-Wiebe says Betsy can't declare bankruptcy on student loans, but the interest is tax-deductible, and because the amount owing is very large, it should result in a sizeable tax refund.

Betsy should also apply for the Manitoba Tuition Income Tax Rebate.

"It could save her up to $2,500 in Manitoba tax each year, depending on the total amount of tuition she paid since 2007 and her annual provincial tax owing."

Although they've been claiming daycare costs on Dirk's income taxes, he can request permission from CRA to have those tax savings applied to his paycheques.

"Even a $60 increase every two weeks in net pay will help ends meet easier cheque to cheque and make it more likely that the couple will have more money to make debt-service commitments."

And when the pay raises do come along, they should pretend as though they didn't occur.

"Continue to live on the income you've been used to instead of spending the new higher amount," she says. "Redirect all the extra money each paycheque specifically to additional debt payments and emergency savings."

It's by no means an easy road, she adds, but Dirk and Betsy must address this problem as aggressively as possible. The longer they carry the debt load, the more likely it is the cost of carrying the debt will increase because low interest rates won't stick around forever. And when rates rise, so, too, will debt-servicing costs.

Still, they are on the right track. They already know in five years one major debt -- about $54,000 -- will be repaid. This will free up more cash flow to pay down other debts even faster, and the paydown will only continue to accelerate.

Until then, they'll have to work hard to make additional progress, becoming very conscientious spenders who never stray from their budget. Yet in the end, they may even find having a structured spending plan actually reduces the stress they feel over their finances.

"That's because they will know that if they make deliberate choices about spending that are realistic and inclusive, they will be able to cover all their costs," Massey-Wiebe says. "And yes, while they have only a very small allowance for entertainment and dinners out, they can still enjoy it without guilt or worry because they have determined that they can do it and still cover all other needed expenses."

Republished from the Winnipeg Free Press print edition June 22, 2013 B13

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