Should I pay off my student debt or invest my money? ( Canadian)

May 20, 2014 11:08 AM

Going back to school in September after working for ~ 2 years. I've saved up a bit and I'm wondering how to make the best use of it.

I'm going back to school in September. This means the precious, precious money I've saved over the past year is going to be whittled away and I need to know the best way to do it. I realize I'm privileged to be able to even put away this much for savings, and not everyone can manage this while paying their student loans. I appreciate any help you can give ( I never took Finance for Dummies 101 and my mom doesn't pay any attention to what I do with my money so I've never received any financial advice)

- My student loan principle is $5800 (CAD) and I pay $65.09 per month on that. The interest is at 3.5%. So I think the total of what I actually owe is something like $6600. I've been paying it for the past 2 years.

- I've saved $11,500 from my job over the past year. The savings account it's in has a 1.3% interest rate.

- I'm going on a Birthright trip in August which is mostly free but I want to save about $1000 max for that in case I decide to extend the trip by a few days.

Before going back to school, (where I will take on more loans but it's in Quebec so tuition is pretty cheap), should I pay off my original debt and have barely any savings?

Or, should I continue paying off the loan from my monthly income and invest my savings elsewhere? If invest, what should I do with the money?

Or, should I just use my savings to pay my tuition when I go back to school, and thus not take on any more debt?

I expect my tuition to be around $1300 per semester and the program itself is 3 semesters.

posted by winterportage to Work & Money (10 answers total)

Best answer: The simplest answer would be to pay off the student loans, since the interest rate is higher than the interest rate on your savings account, so in the long run this would save you money.

However, 3.5% is pretty damn low for a student loan, and my thought would be that it would be nice to have some of those cash reserves available to you while you're not working. Presumably, you will also need money to live on beyond just tuition yeah?

If it were me, I would probably just keep paying on the student loans so they don't grow (65 a month is cheap), use my savings to live on while in school so I accrued as little additional debt as possible and still maintained a bit of an emergency fund as things will come up and you may need immediate cash access.

I'm an American, so I look at the possibility of having less than $10k in combined student loan debt after grad school as being so small it's almost laughable, so ymmv.
posted by Lutoslawski at 11:14 AM on May 20, 2014 [2 favorites]

Best answer: If you're going to be going to school full time and not working I would absolutely hold on to the savings and the debt. This is a judgement call kind of situation and you're probably going to see arguments in both directions, but I think that having a nice financial cushion while you're in school is worth paying (net) 2.2% interest. Also think about your financial goals after you finish studying. "My small student loans are paid off" can't go towards a down payment on a house/apartment; $11,000 in cash can.

Also definitely don't pay off your undergrad loans and then take out new graduate loans unless you're getting better deal on the new loans.
posted by mskyle at 11:17 AM on May 20, 2014 [4 favorites]

You basically don't have any student loans right now. Keep it in savings, and pay off your loans once you're finished with grad school. Be sure to buy a nice chess or backgammon set in Israel.
posted by oceanjesse at 11:32 AM on May 20, 2014 [1 favorite]

Best answer: Your student loans will not require payment and will not accrue interest while you are in school (assuming they are govt backed loans - you must notify them of your change of status). For the duration of your return to school they are in effect an interest free loan so you should not pay them off.
posted by srboisvert at 11:49 AM on May 20, 2014 [2 favorites]

If you didn't have this debt and had $3500 less, would you borrow it to put it in a savings account?

If the answer is no, pay it off.
posted by bensherman at 11:53 AM on May 20, 2014 [4 favorites]

Apart from having a few thousand dollars for emergencies, it doesn't make sense to keep a lot of money in your savings account while you are still in debt. If you pay off your debt right now, you'll still have 5,700 dollars left, which is a great safety cushion. So my advice is to pay off your student debt and not have to worry about that any more.
posted by tecg at 12:25 PM on May 20, 2014 [1 favorite]

You should speak with your school's financial aid office. In my province student loans are offset by your income and savings. You might actually need that money to pay for school.

Also +1 srboisvert. Student loans are interest/payment free while you're attending a qualified school.

Given the options for loan remission and deferment if you fall upon hard times, I'd be very careful about giving up that cash.

But again, these are issues to explore with your financial aid office.
posted by sockpup at 12:55 PM on May 20, 2014 [1 favorite]

It would be helpful if you could clarify whether you have a government or private student loan. A private loan might not have interest deferment. A public loan might be clawed back (if you request more) if you have savings.

If you have interest deferment and there's no trouble with having savings, I would keep the money in a savings account (maybe TFSA). Then, when you graduate, pay down the loan, keep the rest in savings, and start putting at least $2k a year into RRSPs or TFSA (and more as your income increases). And start saving for a home.
posted by Chaussette and the Pussy Cats at 1:19 PM on May 20, 2014

sockpup has a very good point about the income earned during the pre-study period affecting how much money you get each semester. I worked throughout school and always ended up with smaller loan amounts as a result. I also ended up with much less debt, so there's that.

For what it's worth, you could pay that loan off and go on your trip and still have thousands more than I ever had as a student. At the rate you're going, you could save quite a bit more over the summer too.

I realize I'm privileged to be able to even put away this much for savings

No. You're responsible. I think you're going to do just fine.
posted by futureisunwritten at 1:57 PM on May 20, 2014

Response by poster: It would be helpful if you could clarify whether you have a government or private student loan.

I have a government loan in the province of Quebec.
posted by winterportage at 6:13 PM on May 20, 2014