Should I pay my student loan off?
Few students can afford to pay for their post secondary education without some form of education financing. The average student debt for graduating students in Canada is over $20,000, seriously harming their financial position as they enter the workforce. Should students be concentrating on paying off student loans right away?
Delay Payments with Interest Relief.
If you have graduated and are looking for work or you are under-employed, look into government assistance in the form of interest relief. Interest relief is granted for periods of six months, up to a maximum of 30 months.
During periods of interest relief:
- You’re not required to make payments on interest or principle of your loan.
- The Government of Canada or Government of your Province will pay the interest on your loans for you.
- Any voluntary payments you choose to make during periods of interest relief will go directly towards reducing the outstanding principle.
Apply for interest relief right away to ensure you meet all of the eligible conditions, which includes:
- Your monthly gross family income falls within the maximum income guidelines.
- You reside in Canada.
- Your loan is not already in default.
- You have signed a consolidation agreement for your Canada Student Loans.
Make the Minimum Monthly Payment
As a new graduate entering the workforce you are faced with many financial pressures for what to do after college, from finding a suitable place to live, making car payments, and perhaps upgrading your wardrobe. Aggressively paying down your student loans doesn’t need to be an initial priority in your life. Here are a few reasons why:
- The interest rate is cheap – If you choose the floating rate option the interest rate on your National Student Loan will be prime + 2.5 percent, which currently equals 5.5 percent. Provincial loans are at prime rate which is currently at 3 percent (Newfoundland does not charge interest on student loans).
- Income Tax credit – Any interest paid on your student loan is eligible for a 15 percent Income Tax credit. So if you paid $1,000 in interest over the course of a year, you would get $150 back on your Income Tax paid.
- Cash Flow – Why use all of your cash flow to pay off student loans when you could be establishing an emergency fund, saving for a down payment on a house, or paying off higher interest student credit card debt?
Why else should I not pay down my student debt?
You have other priorities. I left University with close to $30,000 in student loan debt, and when I moved in with my girlfriend (now wife) she brought with her an additional $25,000 in student debt.
I was fortunate enough to have purchased a house when I was 19 (with my parents co-signing), and after University I sold the house for about a $30,000 profit.
Rather than completely paying off my student debt and starting over at zero, I paid off some debt and used the remainder for a down payment on the house we still live in today.
Our house has doubled in value since we purchased it over 7 years ago, and we would not have been able to achieve these gains by just paying off student loans. We leveraged an asset, which gave us more potential for financial gains.
Just Pay It Off Already.
Seven years after my wife and I left school we have managed to pay off all of my student loan debt, however we still owe about $5,000 on my wife’s student debt. Our monthly payment is $145.
While we could manage to pay this off in one lump-sum and be rid of student debt once and for all, I still believe that our money is better off investing in our RRSP and TFSA, or paying off our mortgage.
Surprisingly many smart graduates say that their student loans aren’t costing them much money, so they decide to pay them off early. However a loan this cheap shouldn’t be paid off more quickly than necessary.
Eliminating your high interest rate debt and building up some savings in a TFSA while improving your career prospects should be your main focus out of school.
Paying off student loans early may seem like the prudent thing to do once you graduate, but don’t weigh yourself down with an unnecessary burden while you have other priorities in your life to look after.
This was a guest post from Robb Engen.