3

I recently graduated from a university in Alberta with just about $19000 of student loan debt, between my provincial and federal loans. However, as a graduation present, I was given $20000 to either pay back the loans immediately, or to invest. In addition, I have around $8000 of other savings from internships during university, and I've got a stable job in my field that covers my living expenses with enough excess to contribute to the limit to my RRSP and have more left over to be invested elsewhere/make the normal payments on the loans. I don't really have any investments right now at all, how should I invest/pay down these loans to maximize return? My first thought is to pay down the Canada student loan as quickly as possible because the interest rate is high (and already accruing - the Canada loan accrues interest from the day your degree ends, the Alberta doesn't start accruing until the end of the grace period 6 months later), and then either pay down the Alberta student loan, or invest the remainder of the gift into a TFSA based investment and pay the loan off over time.

Details of the Loans:

  • Canada Student Loan - $8000 at Prime + 2.5% floating - currently 5.95%
  • Alberta Student Loan - $11000 at Prime floating - currently 3.45%
5

I agree with your first thought. Go pay off the $8K Canada Student loan as soon as you finish reading this paragraph. I don't think anyone on this site is going to disagree with this.

Next, (seriously, if you haven't done it yet, go pay the $8K loan off first and then come back and read the rest of this answer), I would recommend knocking out the $11K loan right away too. Since it's interest free for up to 6 months, you could consider putting the $11K into a 3 or 6 month CD, making a small profit (perhaps $75 which is obviously dependent on the CD rate) and then pay off the $11K a few days before the interest turns on. If it were me I'd probably just knock it out now and save my energy on something else instead of chasing $75. But if your existing bank can set it up quickly, it's something to at least consider.

Last, I like the idea of maxing our your RRSP and TFSA if you can.

  • 1
    I would agree with this answer, with one addition... get in the habit of 'paying' these loans every month anyway, even though they are 0'd out. That is, pay them off now to get out from the debt, but make payments to a savings & retirement account every month as if you had to pay off these loans. In effect, consider the money as a loan from yourself. This way, you create a strong retirement savings habit. And the biggest thing you have going for you is time to let the savings earn interest and mature. $500/month in your 20s adds up to a lot come retirement age. – R. Hamilton Jun 1 '18 at 15:32
  • Could you expand on why both loans should be paid off immediately? I'm not saying you're wrong, but at first glance it doesn't seem sound compared to an average 8% return from stock investments and I would like to understand the reasoning; others may be in the same boat so I think this would be a valuable addition to your answer. My first thought was to invest everything in a series of ETFs and pay minimum on the loans, though that does run a risk if the prime rate rises considerably. – Nicholas Jun 1 '18 at 16:24
  • @R.Hamilton This suggestion is golden, and I wish I had done that. I ran the numbers and had I invested 20% of my income from the time I started working I could have retired at 34 with $80k annual returns from my investments. We now force our children to save 20% of their earnings directly into a retirement account as a requirement for getting a job in hopes they continue the habit. – Nicholas Jun 1 '18 at 16:26
  • @R.Hamilton in general that's good advice. I got the impression that OP is already prepared to max out the RRSP (18% up to $26K) and possibly the TFSA ($5500) too annually, which IMHO would adequately cover the type of retirement savings you're referring to. – TTT Jun 1 '18 at 16:43
  • @Nicholas - it basically boils down to risk. The higher the rate of return, the higher the risk, and there are no guarantees. I like to use CD rates as a benchmark for a guaranteed return. IMHO in order to play the arbitrage game you need to be dealing with very low rates on debt, say less than CD rates, and they should also be fixed rates unless the investment rate of return varies along with it. OP's loans are variable and in the last year prime has already increase 0.75%. I wouldn't completely discount your idea though, it's always worth considering, though I lean towards kill debts first. – TTT Jun 2 '18 at 20:31

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Not the answer you're looking for? Browse other questions tagged or ask your own question.