Investing vs. debt repayment
The financial industry spends a lot more time talking about investing than debt repayment, so that can be an enticement to start building an investment portfolio. Investing has become more gamified as well, and many young people know someone—perhaps indirectly through social media—who has made it rich investing in meme stocks, cryptocurrencies or NFTs. This can lead to a fear of missing out.
The truth is that most investors make money slowly over time, and even the professionals have a tough time keeping pace with stock market returns, let alone beating the market. As a result, it can pay to take a long-term approach when deciding between investing and debt repayment and choose what works best for your situation.
One of the goals of financial planning is to build your net worth. Your net worth is calculated by taking your assets and subtracting your liabilities. When you are young, sometimes this formula results in a negative net worth. But whether you build your assets or reduce your liabilities, both increase your net worth. And both are good to do financially. Which is better for you depends on a few factors.
No more interest on Canada Student Loans
If you have a Canada Student Loan, you’ll be glad to know the federal government permanently eliminated interest on these loans as of April 1, 2023. Any interest accumulated prior to that date must still be repaid, but no new interest is accruing. The province of New Brunswick has done the same for Canada–New Brunswick integrated student loans.
As a result, some student debt is interest-free, which makes it less time-sensitive to repay. If you can invest in even a high-interest savings account—let alone a guaranteed investment certificate (GIC), stock, bond, exchange-traded fund (ETF) or mutual fund—and earn a higher rate of return than zero, you will be better off investing than paying down your interest-free student debt.
That said, you still need to make payments on federal student loans, starting six months after you are no longer a full-time student. These payments have an impact on your ability to qualify for other credit, including a mortgage or car loan, so there is a benefit to paying your debt off.
Interest on provincial student loans
Provincial or bank student loans will generally have interest payable. If you have a debt with a 5% interest rate, and you have the option to pay it down or invest, you generally need to earn a return higher than 5% to be better off investing. There can be exceptions, like if you have a company retirement or savings plan with an employer matching your contributions. This can make investing the better choice.
You can claim student loan interest on your tax return, though, and this can make your after-tax interest cost a bit lower. You can claim student loan interest you paid in the current year or the previous five years if you received the loan under: