Paying your student loan is no fun. Every month, money that could’ve been used towards regular expenses, investments or feel-good purchases is pulled away from your account.
But is there a right amount of money to allocate towards your loans? Is it best to pay them off as quickly as possible?
Two years ago, I wrote about how some younger folks were using low interest rates as an opportunity to divert more of their money to investing, rather than paying off their government student loans quickly.
Higher interest rates have made many people prioritize debt payments, but Evan Parubets, investor specialist at Steadyhand Investments, says the situation could be different for student loans.
That’s because the federal portion of student loans are staying interest-free.
In my scenario, the Ontario portion of my loan – which currently has a 7.45 per cent interest rate – makes up less than 14 per cent of my overall balance, and so the vast majority of the loan is indeed interest free.
If your situation is similar to mine, then Mr. Parubets says you might want to focus on building your investment portfolio through a TFSA, or through an RRSP for the tax incentives.
Investing while young is about building discipline, according to Mr. Parubets. So if you were putting $500 per month towards your loan payments and want to drop your payment to $200, don’t spend the leftover willy-nilly. Put that $300 into long-term investments and you’ll be setting good habits for yourself.
However, if a large portion of your loan was given by your province, Mr. Parubets says it’s worth tackling your debt first. The Ontario interest rate of 7.45 per cent is a hard target to outperform through investments.
Lastly, consider paying off the provincial portion of your loan in lump sums to avoid interest altogether. One Reddit user found that this was only possible by mailing in cheques with a letter explaining his plan. For them, the extra effort was worth it, and Mr. Parubets says it’s worth inquiring with the National Student Loans Service Centre about similar action.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, January 26, 2023