Paying Off Student Loans– Don’t Rush!

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:

  1. 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).
  2. 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.
  3. 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.

9 thoughts on “Paying Off Student Loans– Don’t Rush!”

  1. This can be true but there’s the non-financial part of it that I think everybody has to answer, and that’s how comfortable they are having this debt. For some, the financial aspects of a low interest rate and meeting other goals is perfectly fine, in which case this advice is perfectly sound. For others, though, having this debt and the fact that they owe someone nags at them, and this simply shouldn’t be dismissed. A buddy of mine is a lender at a bank, so he knows perfectly well how low interest rates and such play a factor and that there could have been different options that could have better added to his bottom line. Still, he hated having this debt, and worked to pay it off early. Even now, in hindsight knowing that he could have used those extra payments to generate more money in stocks or even savings accounts (back a few years ago), he says he wouldn’t change a thing. Why? Because the peace of mind of knowing that he doesn’t owe that money makes it worth it. I think everybody needs to address this and factor this into their decision.

    1. Hi Money Beagle, peace of mind can play a large role in deciding whether or not to pay off your student loans early. If you have the capacity to do so, then absolutely pay them off early. However, most new graduates aren’t in the best position to start doubling up on their monthly payments or to apply additional lump sums onto their loan.

      I suggest that this is ok, since you will likely be in a better position to pay off your loans later on, and in the meantime you won’t be so overburdened by loan payments that you can’t get started on building your assets.

    2. Good point, Money Beagle! I hate owing money to anyone, so I have to admit my student loan nags at me — especially since I have enough in the bank to pay it off anytime. However, having an emergency fund and retirement savings provides more peace of mind, and having faced a job loss I was glad I did it that way. (Hindsight is 20/20, right?)

      It’s a personal decision. Whatever makes people most comfortable.

  2. I think you make a good argument for managing student debt rather than making it a priority.

    When I first started out, I set a reasonable minimum payment (higher than the bank’s required minimum payment) and then made it a goal to pay off extra each month as I was able. That’s allowed me to build up an emergency fund and start building my RRSP. I felt it was important to get that early start on my retirement savings, and hope that will offset the extra interest I’ve paid by not paying down my student debt sooner. (not to mention the peace of mind knowing I have a plan!)

    1. That’s a great strategy Elizabeth. Once you find your comfort zone with your finances you can slowly start raising your payments. Start building up other assets and make an overall plan (as you said) rather than pouring every available resource into your student debt.

  3. @SPF
    When it comes down to student loans vs. mortgage in this low rate environment, you’re right…the student loan becomes more difficult to ignore. We will be killing ours off by the end of the year.

    But we made sure to get the rest of our financial life in order before we made this a priority. This included waiting a year or so after my wife decided not to go back to work to make sure we could handle making extra payment as a single income family.

  4. I’m just starting my career (24 years old and just graduated university) and I have 3 things on the table that i need to look into, TFSA, RESP, and under $10,000 in a student loan(not a government one, a line of credit) .

    While I’m slowly paying off my loan….should i focus in TFSA? RRSP? or both? what are your thoughts?

    1. Depends on what you do with your tax refund 😉 TFSAs didn’t yet exist when I was in your shoes, so I used the RRSP and then used the tax refund to pay down debt and boost my emergency fund.

      However, if your income right now is lower than you think your income will be in retirement, than many experts say you’re better off using the investment vehicles available through the TFSA to start funding retirement.

  5. Thanks MD, and Elizabeth. I was lucky in my 2010 year since I was in school for 4 months and worked for 8, so I was under cut off for the next tax bracket so I didn’t really need to focus on RRSP’s. Looks like I’ll be focusing on TFSAs for the next few years!

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