Low rates and tax deductibility encourage some to invest in student loan repayment
When the federal government set the federal student loan interest rate at zero and provincial interest rates were set at a low 3.5 percent in Ontario, Chantelle Gubert decided it was a perfect opportunity. divert more money to long-term savings.
“What I realized is that my investment is enough that while my investment is doing better than around 4.5% right now, it actually makes more sense in the long run for me to invest. in this area, ”said Gubert, who is in his twenties and lives and works in downtown Toronto.
She is now adding more funds each month to a tax-free savings account, having previously tried to pay off as much of her loan as possible through a second job in the restaurant industry before the pandemic.
“The student loan will be there forever and the interest is tax deductible, but you don’t always have to start your nest egg,” she said.
Gubert’s new strategy comes as the federal government announced that the interest rate on the federal portion of student loans will be frozen at 0% until 2023, which some financial planners say could be an opportunity for young Canadians diverting money to term savings plans for things like retirement.
Jason Heath, chief executive of fee-only financial planning firm Objective Financial Partners, said Canadians might see the federal government’s announcement as an opportunity to invest, but they should be confident their investments will pay off.
“What worries me the most right now is there’s a lot of volatility and things like cryptocurrencies and GameStop stocks that people think they can kill off,” said Heath, based at Markham, Ontario.
“If someone takes a risk with money they would otherwise have invested to pay off their student debt, they may regret it in the future and in the years to come.
Heath said diverting money from loan repayments to personal savings would make sense for stable investments like a group savings plan or a workplace pension matching program.
He said the low interest rate could also help people who need cash to pay off other high interest debts they may be facing, such as credit card debt.
One of the 2021 federal budget proposals states that Canadians will only be required to repay their student loans if they earn more than $ 40,000 per year, up from the previous threshold of $ 25,000. Heath said this could be another opportunity for people to deal with high interest debt first.
Ian Collings, a paid-only Vancouver-based financial planner, agreed that using low interest rates on student loans to leverage investments could be a good way to advance your financial life.
But he said people should be aware that the optimistic picture of student loan repayment may change in the future.
“You can get used to not having that bill and not having to pay off the debt,” Collings warned.
“When 2023 or 2024 arrives, there will be no continuation of this program, the reappearance of this bill could be a surprise.”
Back in Toronto, Gubert said her plan would require her to keep an eye on her investments and that she will watch if the provincial interest rate for her student loan changes.
“It’s just a matter of trying to predict what my long-term earnings will be, but interest rates will also be a difficult thing to predict,” said Gubert, who said the economic boom expected after the vaccination could change his situation.
“It’s a bit of a balancing act – I’m going to have to do my own due diligence.”