Low Student Loan Interest Rates Could Be An Opportunity To Get Ahead Of The Investment
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 have come to realize is… I have enough investment that if my investment is doing better than about 4.5% right now, it actually makes more sense for me to ‘invest in this for the long term,’ 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 with 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 to consider diverting money to long-term investments. term savings plans for things like retirement.
Jason Heath, managing director 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 perform.
“The biggest thing that worries me right now is there’s a lot of volatility, and things like cryptocurrencies and GameStop stocks that people think they can kill off,” Heath said, based in Markham, Ontario.
“If someone takes a risk with money they would otherwise have invested to pay off their student debt, they might regret it in the future and for years to come.
Heath said diverting money from loan payments to personal savings would make sense for stable investments like a group savings plan or a workplace-matched retirement 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 Vancouver-based paid 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 pink picture around student loan repayment could change along the way.
“You can get used to not having that bill and not having to pay off the debt,” Collings warned.
“When 2023 or 2024 comes, there will be no continuation of this program, to see this invoice reappear might be a surprise.”
Back in Toronto, Gubert said her plan will require her to keep tabs on her investments and that she will watch if the provincial interest rate on 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.”
This report by The Canadian Press was first published on April 27, 2021.