3.5% Interest Student Loan or use all of my savings on Tuition?

Question

I've got one year of University left and luckily I've managed to stash around ~$18k in savings that my expenses never cut into. My tuition for my last year will probably be around $13k.

I hate the idea of being in debt - but aside from emptying my savings account, the alternative is that I take OSAP to cover my tuition and pay it back +3.5% over the course of five years or so. Roughly $300 a month. I'm a bit paranoid about money - I keep two checking accounts as buffers with between 500 - 1000 dollars available at short notice in each of them in case of emergency, and then my savings account is there to accrue interest on money I never intend to spend. That's why I hate the idea of emptying out my savings on tuition - I feel like I'm removing a large portion of my stack of hay that'd catch my fall.

1. Does anyone think the direction the Ontario Government is moving in will mean my OSAP payments may get less forgiving rather than more?
2. Am I setting myself up to be bamboozled by my government?
3. Should I bite the bullet and live paycheck-to-paycheck until I get a job in order to avoid that bamboozling?

To note, my prospects seem ok - I'm on a well-paying internship right now for 14 months and they seem willing to take me on once I graduate. Any advice appreciated. Thanks.

Answer 1

I had found myself in a somewhat similar situation from my education. From what I realised, is that it really depends on your debt/risk tolerance. Also to note that the rate isn't actually 3.5% but 70% federal loans of prime + 2.5% and 30% provincial loans of prime + 1.5% (Which is currently 3.95% + 2.2% = 6.15% interest overall!).

1. If you are not debt tolerant and not risk adverse, then it would be safer to not take OSAP (Assuming you are not eligible for any grants). This will save you from the 6 month federal interest, as well as possible peace of mind.

2. If you are comfortable with handling debt, then I would suggest you apply for OSAP and get the loan (and hopefully you would be eligible for some grants, aka free money!). Then you can keep the 18k and allow it accrue interest or invest it (as mentioned below). You will also gain access to the loan money interest free until the end of your schooling (at which point you get dinged at minimum 6 months of the 70% federal loan - Prime Rate + 2.5%). If you would like you can you can use these interest rates and your eligible loan amounts to determine the actually interest gained, and required profits for it to be worth while!

   • If you are risk tolerant like I was, you can invest some of it into the stock market through a Tax Free Saving Account (if eligible) and hope it goes up. The strategy here is to either jump start your longer term investments, or get lucky with short term gains. By investing for example $5k in stocks for the future, if the investments go up in the short term (1 year) you could cash out and make a profit (woohoo!). If however the investments declined (or aren't ready to be sold), you still have a lot of savings ($13k) to sustain yourself and pay off debts, allowing the investments to stay for the long term. Note that there are some rules for TFSA's in that any withdrawn money will be deducted for your maximum deposit limit until the next year (Make sure you are comfortable with those - The bank you set up this account with should be able to answer any of your questions). Also, it is free to move money into and out of a TFSA, but stock transactions generally have a cost of $10 (so $10 buying, $10 selling = $20 fee).

   • If you are not risk tolerant than you can tie up your money in 1 year bonds (only if you know you won't need access to it during this time), or keep it in a high interest savings account so it will always be available.

tl;dr If you don't like risk or debt, don't take the loan. If you like risk, take the loan and invest a comfortable amount (bonds or the stock market and cross your fingers).

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OSAP interest rates: https://osap.gov.on.ca/dc/TCONT003397

Answer 2

According to the OSAP website you will not be charged interest until 6 months after you graduate for the Ontario portion of your loans (Canada portion accrues interest immediately after graduation). The loans are interest and payment free while enrolled full-time.

That means for the next year you could earn interest on your savings and have extra cushion at no cost to you.

Live frugally while in school and you can pay off all or most of the loans before you start accruing interest. Even if you can't pay it all off, you'll be paying a relatively small amount of interest. The rate is not fixed currently, it's based on prime rate when your first payment is due, so the main risk is skyrocketing interest rates in the near future, but this is unlikely.

If the lack of savings will cause you anxiety over the next year, then taking a loan seems worth it. If any portion of what you can get from OSAP is grant, you can take that without hesitation.

Answer 3

Both your aversion to debt and your aversion to living paycheck-to-paycheck are admirable. Many people live in both of those states.

Fortunately, if I am reading your question correctly, you can avoid both. You currently have $18k in your savings, and your tuition for the upcoming year is only $13k. This means that if you pay cash for your tuition, you will be left with $5k in your savings account. That is a great emergency fund for a student. In addition, you are currently employed at a "well-paying" job, so your income should cover your living expenses for the next year.

Congratulations on saving up so much in your savings account, but you don't need to be afraid to spend it. Education in a marketable skill is a great thing to spend money on, and you will still have enough cash left to cushion you from unforeseen situations.

3.5% is not exactly a high interest loan, but it is certainly much more than you are earning in your savings account. It doesn't make sense to sit on a pile of cash that you don't need and borrow money at the same time.

Answer 4

Choosing to pay off debt vs. make payments should always consider the utility of both:

Paying back $13.5k over 9.5 years at 3.5% would mean you pay $2,388 in interest over the course of the loan. Leaving $13.5k in a savings account at a 1.5% APY for 9 years would give you $2,000 in compounded interest.

This means you would effectively be paying $400 over the course of 10 years to 1) build credit history, 2) leave yourself an emergency fund, and 3) open up the possibility of investing the money elsewhere. All while leaving yourself to opportunity to reallocate that money somewhere that will give you more value (monetary or otherwise).

Please ask yourself the following:

• Is being debt-free a higher priority to me than building credit?
• Will paying off the loan entirely leave me enough of an emergency fund? (Six months of expenses worth is the typical recommendation.)
• Can I invest my savings somewhere that will give me an even higher return than the loan interest rate?

Answer 5

If you 1) own or co-own a new business in Ontario or 2) work for or volunteer with a not-for-profit organization, you are most likely eligible to extend your grace period an additional 6 months. This could buy you additional time to find a job and save money to pay back the loan before the interest kicks in.

Also, you may be eligible for repayment assistance if you are not earning much: Repayment Assistance Estimator

Answer 6

The core of the answer here is independent of the specifics of the Canadian education funding system, IMO.

You are approaching the transition to earning your own living, and having to operate within the financial constraints which that imposes on you.

Keeping a cash "emergency fund" of a couple of thousand dollars is highly desirable, so long as you see it as covering relatively short term, low cost emergency situations.

Beyond that, you need a strategy to handle longer term unexpected events - for example a few months during which your are not working (through no fault of your own) but you need to finance somewhere to live, and your day to day living expenses.

I would see your $18k savings as covering that type of scenario. One unbreakable rule of personal finance is simple and obvious, but often ignored when thinking about future plans: you can only spend your money once. If you spend that $18k on your education in your final year, you now have no cushion of cash to get you through an unforeseen situation in future.

You could take the view that it would be better to defer taking out a loan to cover such a situation until you are forced to do so, but that ignores the fact that being in such a situation will not improve your ability to take out a low cost loan. Student loans generally are low cost, compared with other forms of borrowing.

If I were in your position, I would prefer the option of keeping your $18k cash cushion intact, take the student loan, and (as you appear to have done already) have a credible plan to pay the loan off, if nothing else untoward hits you financially.

You might want to consider a different place to park the $18k than a bank savings account - so long as it is still accessible in a reasonably short time scale (say 1 month) with no penalties. The main factor in choosing what to do with it is to preserve its value (against inflation, etc) rather than to hope to increase it, but with a significant risk of the opposite happening. Assuming your income will exceed your expenditure after you graduate, you have a lifetime ahead of you in which to invest your surplus income in the hope of long term gains (i.e. a timescale of 20 or even 50 years) without worrying about short term losses, or the possibility that you have to cash in those investments to meet an emergency.

Answer 7

Think 18k savings is by far easier re-saved then the 13k debt. Sure there is opportunity cost of finishing your degree now, and having 18k immediately available, but quantifying the opportunity cost requires a lot of for site. At best 13k at lest say 8% apr over say 6 years is 20k. So your opportunity cost of 18k liquid cash now must at least be 2k to break even. The interest on the student loan is very easily predicted and quantified in best and worst cases. The other end isn't and probably should be weighted by some probability which even then isn't necessarily useful. Some things like say a down payment on house or retirement fund may be able to prove positive over using your savings now. But given your age and uncertainty and risk associated with recent college grad, I don't like it.

Answer 8

The endowment effect is a psychological theory that people value things they already have more than the same things if they were thinking of obtaining them. https://en.wikipedia.org/wiki/Endowment_effect

To try and verify you aren't suffering from this think about your situation like this. You are 13k in debt and you receive 18k as a gift. Do you pay off your debt and bank the remaining 5k or bank the whole 18k and keep the debt?

When put like that it is more likely you will want to pay up front rather than take a loan, however other people made good points about the terms of this loan. If it really is an interest free loan that you can repay in full with no penalty before you need to start paying interest then there is no reason not to take it.

Answer 9

This question has the ability to degenerate into a political argument, so I will not address the potential "Ontario bamboozlment".

Its great that you hate debt despite the avocation of taking on debt from the media. Guess who the media works for? Banks, and others who profit from consumers taking on debt. Your instincts are right on.

First I would go to my current employer. Do they want to take you on after you graduate? Would they be willing to help you with your current tuition? Can you negotiate something where everyone agrees on post graduation salary and they either help you with tuition or even bump your salary? That could solve your issue right there.

There was a study done where most emergencies people experience are less than $1,000. You will have 5 times that amount, and it will only be for a short time.

Failing that I would use savings. You will still have some buffer and that small buffer will help you curb spending until you have your savings replenished anyway.

Even if you do decide to do the student loan, I would not take the three years to pay it off. Get that thing paid off in a year or less. Just continue to live like a student, and throw all extra cash at the debt.