I am an Albertan currently about $8,000 in debt from student loans. Roughly $5,500 of this $8,000 is an Alberta Student Loan, while the rest ($2,500) is from the National Student Loans Service Centre (Canadian Student Loan). I think that the $5,500 will have an interest rate of approximately 3% per year, while the NSLSC loan charges approximately 5% interest per year.

Now, I recently invested into the VOO vanguard S&P 500 index fund. I also researched that the average return on investment on the S&P 500 is approximately 10% per year (so long as you keep the investment in for 30 years or more).

So, I currently have about $7000 in cash, which I could use to pay off my student loan debt, or put it into the VOO fund.

The way I see it, if I did not pay off the loan for 41 years, it would grow to about $35541.17. As well, if I put the 7000 into VOO and let it sit for 41 years, it would grow to $316814.78. I would then have a profit of about $281273.60.

It seems to me if I used the $7000 to instead pay off my debt now, I would be making the more "foolish" decision. However, I may be missing something, since everyone around me seems to think paying off one's student debts are always a financial priority greater than investing.

Additional information: I am also going back to university for another 4 years to pursue a degree in commerce, which will total to another $30,000 in loan debt.

  • While I'm not the biggest fan of debt I do see it as a tool. Between 2007 and 2009 the S&P dumped off just over 50% of its value. It doesn't matter how long your money was in there, half of it is now gone. Cited past returns aren't guaranteed by any means. Personally I'd go half and half, or something there about. A lot of life is going to happen between now and 41 years in the future. While it's good you're weighing investment against debt I don't think you should be operating on a 41 year horizon when the debt instrument will likely require some sort of minimum payment.
    – quid
    Commented Dec 8, 2015 at 2:49
  • 2
    Pay off your debt, it is such a small amount it is not going to make a huge difference in your life. Just be done with it.
    – Pete B.
    Commented Dec 8, 2015 at 14:05

3 Answers 3


You are on the right track with your math, but be wary of your assumptions.

If you can borrow money at x% (and can afford to make payments on the debt), and you can get a return of > x% from investing, then you would make more money by keeping the debt and investing your savings.

Another way to think of it: by paying off the debt you are getting a guaranteed 5% return because that's the rate you'd have paid if you kept the debt.

Be wary of your assumption of getting a 10% return in the S&P 500. Nothing is guaranteed, even over the long term. Actual results may well be less, and you could lose money.

It doesn't have to be all-or-nothing: why not pay off the higher rate debt at 5% and keep the 3% debt? That's a guaranteed 5% return by paying off the NSLSC loan. And 3% is a pretty low interest rate. If you can afford to make the payments, I see nothing wrong with investing your savings instead of paying off the loan.

Make sure you have an emergency fund, too.


A major thing to consider when deciding whether to invest or pay off debt is cash flow. Specifically, how each choice affects your cash flow, and how your cash flow is affected by various events.

Simply enough, your cash flow is the amount of money that passes through your finances during a given period (often a month or a year). Some of this is necessary payments, like staying current on loans, rent, etc., while other parts are not necessary, such as eating out.

For example, you currently have $5,500 debt at 3% and another $2,500 at 5%. This means that every month, your cashflow effect of these loans is ($5,500 * 3% / 12) + ($2,500 * 5% / 12) = $24 interest (before any applicable tax effects), plus any required payments toward the principal which you don't state. To have the $8,000 paid off in 30 years, you'd be paying another $33 toward the principal, for a total of about $60 per month before tax effects in your case.

If you take the full $7,000 you have available and use it to pay off the debt starting with the higher-interest loan, then your situation changes such that you now:

  • have $0 in the bank (but see below)
  • have no outstanding debt at 5%
  • have $1,000 in debt at 3%

Assuming that the repayment timeline remains the same, the cashflow effect of the above becomes $1,000 * 3% / 12 = $2.50/month interest plus $2.78/month toward the principal, again before tax effects. In one fell swoop, you just reduced your monthly payment from $60 to $5.25. Per year, this means $720 to $63, so on the $7,000 "invested" in repayment you get $657 in return every year for a 9.4% annual return on investment. It will take you about 11 years to use only this money to save another $7,000, as opposed to the 30 years original repayment schedule.

If the extra payment goes toward knocking time off the existing repayment schedule but keeping the amount paid toward the principal per month the same, you are now paying $33 toward the principal plus $2.50 interest against the $1,000 loan, which means by paying $35.50/month you will be debt free in 30 months: two and a half years, instead of 30 years, an effective 92% reduction in repayment time. You immediately have another about $25/month in your budget, and in two and a half years you will have $60 per month that you wouldn't have if you stuck with the original repayment schedule. If instead the total amount paid remains the same, you are then paying about $57.50/month toward the principal and will be debt free in less than a year and a half.

Not too shabby, if you ask me. Also, don't forget that this is a known, guaranteed return in that you know what you would be paying in interest if you didn't do this, and you know what you will be paying in interest if you do this. Even if the interest rate is variable, you can calculate this to a reasonable degree of certainty. The difference between those two is your return on investment.

Compare this to the fact that while an investment in the S&P might have similar returns over long periods of time, the stock market is much more volatile in the shorter term (as the past two decades have so eloquently demonstrated). It doesn't do you much good if an investment returns 10% per year over 30 years, if when you need the money it's down 30% because you bought at a local peak and have held the investment for only a year.

Also consider if you go back to school, are you going to feel better about a $5.25/month payment or a $60/month payment? (Even if the payments on old debt are deferred while you are studying, you will still have to pay the money, and it will likely be accruing interest in the meantime.)

Now, I really don't advocate emptying your savings account entirely the way I did in the example above. Stuff happens all the time, and some stuff that happens costs money. Instead, you should be keeping some of that money easily available in a liquid, non-volatile form (which basically means a savings account without withdrawal penalties or a money market fund, not the stock market). How much depends on your necessary expenses; a buffer of three months' worth of expenses is an often recommended starting point for an emergency fund. The above should however help you evaluate how much to keep, how much to invest and how much to use to pay off loans early, respectively.


Pay off the debt first. Life circumstances change without notice, and starting any stage of life with a debt puts you at a disadvantage. Luckily, your debt is small. Please also consider accumulating a 6 month emergency fund before making investments. This will further protect you when life hands you a curveball.

  • Would you give the same advice if OP were to invest the money in a matched retirement plan at work? Commented Mar 27, 2016 at 23:45
  • Yes, because OP could lose that job tomorrow and OP would be no further ahead. The debt is so small that it won't put off retirement investment, or other investment options for very long. Not having an emergency fund however, makes any unexpected turn into an immediate crisis. It takes an average of six months to find a replacement job.
    – Willamona
    Commented Mar 28, 2016 at 1:38
  • 2
    I don't know if there are similar plans in Canada, specific to the matching. In the US, the $7000 deposited over a bit of time (say 1-2 years) would be matched for a total $14000 in the account. He loses his job, the $14000 might (depending on vesting) be all his. Far better off. Commented Mar 28, 2016 at 10:03
  • @JoeTaxpayer Is it normal that an employer that provides retirement savings matching will match additional contributions beyond those paid from revolving income?
    – user
    Commented Mar 28, 2016 at 13:17
  • No, that's why I said the deposit would be over time. My employer matched up to 5% of income, so it took $100k of income and 5% saved to 401(k) to get $5000 in matching funds. Given that constraint, I maintain the matched deposit should take priority over all else. Commented Mar 28, 2016 at 15:01

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