Is it Better to Save or Pay Off Student Debt?
So, you’re a recent grad with a great education, a well-paying job with opportunities to grow, and you’re ready to pay back your student loans.
After all, who wants that debt when it could be quickly paid off?
But, is that the best option?
There are advantages to paying off your educational debt, but conversely, there is value in saving for your future.
Which one is the best option for you?
It might not be just one or the other.
Instead, a balanced approach to repaying your student loan while putting money aside for your future may be the best option.
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Make a list of future goals
Before you decide which route you’d like to go, or how aggressively you may want to pay off your student loans, try making a list of financial goals.
They may include some of the following goals:
- Purchase a home. Many times people can pay the monthly mortgage payments but have a harder time coming up with a down payment. Because of this, you may want to decide how much you’d like to save towards a down payment on a home;
- Establish an emergency fund. This is an advisable goal. Start with saving enough money to be able to have a two-month emergency fund. This means if you lost your job right now, you’d be able to pay all your bills for 60 days. A six-month fund may be a long-term goal you have. If you are looking to grow your family by getting married or having children, make sure to adjust this fund as necessary;
- Start a business. This a large goal both financially and as far as work involved. It is unlikely that you will want to begin a brand new business directly after graduating. While this is an expensive venture, it can likely wait several years while you work towards paying off other debts;
- Put money towards retirement. A matched-employer fund is an ideal way to save for retirement. If you simply pay off all your student debt, you will have less money to put towards retirement;
- Pay off existing student debt and credit card debt incurred over the past several years.
Your list may include other financial goals, such as putting aside a college fund for your children, or, if you’ve decided to return to school later in life, you may already own your own home or business.
Perhaps you want to be able to give towards non-profit organizations with your new income.
Whatever your goals are, outlining them will help you understand how where you need to allocate your monthly income.
Putting money into retirement and emergency funds
Many student loans are set up to be repaid over ten years.
If you have a great paying job, you may be tempted to pay those off more aggressively, in the course of four or five years.
However, that might mean you would not be putting money towards an emergency fund, retirement, or other savings.
Using retirement as an example, if you invest earlier in retirement, you can take advantage of compound interest.
Additionally, a registered retirement savings plan is matched by an employer up to a certain amount.
If you’re in this scenario, you may want to begin putting money towards retirement up to the amount your employer matches while also making payments on your student loans, even if you do choose to accelerate the repayment slightly.
Think about tax deductions and interest rates
If the interest rates on your student loans are relatively low, you may want to skip overpaying the loans, even if you have the income to do so.
If your student loan payment interest is smaller than that of what you will receive on your retirement compound interest, paying back your student loan on a slower schedule is advisable.
Similarly, if you have high-interest credit that you are paying back, you should consider making larger payments to these creditors instead of paying a larger amount back to your student loans.
Paying off a higher-interest debt is almost always advisable when possible.
If you are eager to pay down your student debt, remember to make the most of it on your tax returns.
Student loan payments are tax-deductible.
The Canada Revenue Agency allows you to claim a tax credit based on the interest you have paid on student loans, so make sure to take full advantage.
If you do not have any payable tax this year, you can carry the deduction forward for up to five years, allowing you to claim it on a later tax return and reduce your tax payment then.
Consider your long term financial goals
Paying off your debt does create a guaranteed return, but if you are certain you’ll be on the receiving end of a secure income for many years, take a look back at that list of goals you made earlier.
If you want to put a down payment on a home in the next several years, continue making the minimum payment on your student loans and matching your employer in your retirement plan, and then begin setting funds aside for your down payment.
Should paying off your student debt be a relief, you may want to consider paying slightly more than the minimum to repay your student loan in a reasonable amount of time, but paying extra does not have the same advantages as investing in a home, putting money in a high-interest savings account, or saving for retirement that is matched by an employer.
If you’re not sure which option is best for you or you’re not sure how much extra you should be putting towards your student loans, schedule a no-obligation call with one of our expert financial credit counselors today by reaching out to us at Bankruptcy Canada.
Our debt relief professionals can outline the best options for you, help you establish an easy spending guide and household budget, and even negotiate down interest rates on existing lines of credit as you navigate life after graduating.
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