How much should I throw at my debt monthly once I begin working?

[Johnny.Alky]

Hey Everyone, 

I am just about at the end of my schooling and I am becoming concerned about paying back the debt. Personally, I have about:  $20k in OSAP owing (no interest payable yet) and  $40k in PSLOC (at prime). No credit cards or anything just those obligations. I will soon be adding to it with bar fees (unfortunately my firm won't pay these unless I get hired back) and then also some upfront costs of living and moving to a new city - hard to anticipate an exact figure but there you go. 

I know the amount is not outrageous but I am eager to begin repaying soon because of the uncertainty of cost of living increases and rising interest rates. I want to tackle the PSLOC first because of the rising interest rates. I was curious to know what any lawyers here did about paying back the debts and how much I should expect to commit to the debt if I want to pay it off quickly. Also, is this even a realistic plan or should I be planning to invest more instead? 

Thanks, 

[AvenattiBugatti]

I would honestly find a trusted financial planner. This type of thing requires a full understanding of your personal finances to give you most accurate advice. It's not always the case that you should or must pay down your loan as fast as humanly possible. For example, when interest rates are low enough, you have to consider the opportunity cost of not investing your money. Regular market returns can be better than aggressively paying down a low interest bearing loan. That was certainly the case when I was taking out money years ago for law school. Now that interest rates have gone up, I've started paying down my PSLOC more aggressively, but, that doesn't mean that I throw all of my money at the loan. I still make a better return on investment from maxing out my RRSP (much better return, compared to the cost of the interest). So there is a balance there: pay loan quickly, but still allow for RRSP contributions - it just depends on what is a better overall use of my money. That is where a financial planner will help. 

After you talk to someone with proper financial credentials, maybe the best plan includes some allowance for RRSP etc., depending on your income. For now, your general plan will probably involve higher repayments, because the interest rates are eating up any average returns you might expect in the market. But obviously that should be adjusted as interest rates go down, or you start getting paid more, etc. 

[omigone]

Just a couple things I'd add. Definitely seek out the advice of a financial planner but the following may be helpful to consider. With the current high interest rates, it's unlikely that investing will be able to give you a 6.7% return necessary to offset the cost of borrowing for your student loans. Your highest interest debt currently is : 

1) Ontario Loans: You can focus on paying off your Ontario portion of the loan, as interest rates are Prime PLUS 1% (which is about 7.7%) at the moment. If you call the National Student Loan Service Center, they can give you information on how to do this. You need to cut a cheque and jump a couple of hoops. It may serve you well to pay this off as quickly as possible and then make the bare minimums on your Federal loans as there is no cost of borrowing associated (0 interest rates). 

2) Bank PSLOC: The bank loan currently has a high cost of borrowing and you may want to prioritize this next. To get an idea of how much your loans are costing you per day, take the interest rate and divide that by 365 and multiply that number by your principal. At $40,000, it's costing you just over $7 a day or about $210 a month to carry that balance. If you just made the minimum monthly payments (which would be ~$350 a month), most of that would be going towards your interest (over a 10 year period) and not the principal. In effect, you will see very little movement on your balance until you expedite the payment process. Understanding the effects of the compounding interest on your principal may encourage you to pay off your loan more aggressively and pay more than the minimums associated with a 10 year repayment period. 

Of course, all factors will depend on your personal situation and goals. 

[Byzantine]

On 4/16/2023 at 3:14 PM, AvenattiBugatti said:

I would honestly find a trusted financial planner. This type of thing requires a full understanding of your personal finances to give you most accurate advice. It's not always the case that you should or must pay down your loan as fast as humanly possible. For example, when interest rates are low enough, you have to consider the opportunity cost of not investing your money. Regular market returns can be better than aggressively paying down a low interest bearing loan. That was certainly the case when I was taking out money years ago for law school. Now that interest rates have gone up, I've started paying down my PSLOC more aggressively, but, that doesn't mean that I throw all of my money at the loan. I still make a better return on investment from maxing out my RRSP (much better return, compared to the cost of the interest). So there is a balance there: pay loan quickly, but still allow for RRSP contributions - it just depends on what is a better overall use of my money. That is where a financial planner will help. 

After you talk to someone with proper financial credentials, maybe the best plan includes some allowance for RRSP etc., depending on your income. For now, your general plan will probably involve higher repayments, because the interest rates are eating up any average returns you might expect in the market. But obviously that should be adjusted as interest rates go down, or you start getting paid more, etc. 

What kind of return do you get from maxing out RRSP's? I assume it's both the tax savings + your investment using the RRSP money? 

[Mal]

You should make minimum payments until you have a healthy emergency fund. Put it in a TFSA and invest fairly conservatively (you can get a redeemable GIC for 3%+). After that, it tends to make sense to pay down fairly aggressively. It is actually quite difficult to beat Prime with investing, particularly since paying your loan is risk-free. 

For anyone under 35, I would suggest avoiding RRSPs unless you are planning on using the HomeBuyers Plan. For most younger people, it makes more sense to have the flexibility of having money in a TFSA, and waiting tends to be beneficial to use the RRSP deduction when your tax bracket is higher. The tax savings from a TFSA is better than RRSP if you are at a lower rate when you start than when you end, which is the case for most young people. The FHSA is much better than either if you buy a house but you can only keep it open for 15 years.