Student Loan Repayment: How Quickly Should You Pay It Off?

Not many students can afford to pay for their entire post secondary education without some form of education financing.  The average student loan debt for graduating students in Canada is over $20,000, seriously harming their financial position as they enter the workforce.  But should you be focused on student loan repayment as soon as you’re done school?  If not, how quickly should you pay off your regular or private student loans?

Related: Money Advice For College Graduates

Delay Student Loan Repayment Using Interest Relief

If you’ve graduated and are looking for work, or you’re under-employed, look into government assistance in the form of interest relief.  Interest relief on your student loan repayment is granted for periods of six months, up to a maximum of 30 months.

During periods of interest relief:

  • You’re not required to make payments on interest or principle of your student loan
  • The Government of Canada, or Government of your Province, will pay the interest on your student loans for you
  • Any voluntary payments you choose to make during periods of interest relief will go directly towards reducing the outstanding principle on your student loan.

Apply for interest relief right away to ensure you meet all of the eligible conditions:

  • Your monthly gross family income falls within the maximum income guidelines
  • You live in Canada
  • Your student loan is not already in default
  • You have signed a consolidation agreement for your Canada Student Loans

Making the Minimum Monthly Payment

As a new graduate entering the workforce you’re faced with many financial pressures, from finding a suitable place to live, to making car payments, and perhaps even upgrading your wardrobe.  An aggressive student loan repayment plan doesn’t need to be a priority at this stage in your life.  Here’s why:

  1. Interest rates are cheap – If you choose the floating rate option, the interest rate on your National Student Loan is prime + 2.5 percent, which currently sits at 5.5%.  Provincial loans are at prime rate which is currently at 3% (Newfoundland does not charge interest on student loans)
  2. Income Tax credit – Any interest paid on your student loan is eligible for a 15% Income Tax credit.  So, if you paid $1,000 in interest over the course of a year, you would get $150 back on your Income Tax paid
  3. Cash Flow – Why use all of your available cash flow to repay your student loans when you could be establishing an emergency fund, saving for a down payment on a house, or paying off higher interest credit card debt?

You Have Other Financial Priorities

I left University with close to $30,000 in student loan debt, and when I moved in with my girlfriend (now wife) she brought with her an additional $25,000 in student debt.

I was fortunate enough to have bought a house when I was 19 (with my parents co-signing), and after University I sold the house for a $30,000 profit.

Rather than completely paying off my student loans and starting over at zero, I paid off some of the debt and used the remainder for a down payment on a new house.

Our house value doubled in the eight years we lived there, and we would not have been able to achieve these gains if we made student loan repayment our number one priority.  We leveraged an asset, which gave us more potential for financial gains.

Just Pay It Off Already

Seven years after my wife and I left school we managed to pay off all of my student loan debt, although we still owe about $3,500 on my wife’s student debt.  Our monthly payment is $145.

Related: Our Fast Track To Financial Freedom

While we could manage to pay this off in one lump-sum and be rid of student debt once and for all, I still think our money is better off invested in our RRSP and TFSA, or paying off our mortgage faster.

Surprisingly, many smart graduates say their student loans don`t cost them much money, so they decide to pay them off early.  However a loan this cheap doesn’t need to be paid off more quickly than necessary.

Eliminating your high interest rate debt (credit cards) and building up some savings in a TFSA while improving your career prospects should be your main focus out of school.

Paying off your student loans right away might seem like the prudent thing to do once you graduate, but don’t weigh yourself down with an unnecessary burden while you have other priorities in your life to look after.

Where do you stand on student loan repayment – should you pay it off right away, or stretch it out for a while until you an afford to get rid of it completely?

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  1. Mike on August 3, 2012 at 2:17 pm

    I paid the minimum for a few years when I was in a low paying entry level job. When I had a good grip on my finances I started paying a bit more (double the minimum, I think), and now I just have a few thousand left. I’m 31 and have been out of school for 8 years. I think 10 years is a reasonable time frame to pay off your student debt.

  2. David Leonhardt on August 4, 2012 at 8:48 am

    The sooner, the better. Debt sucks!

  3. Samuel Jeffery on November 12, 2012 at 7:44 am

    This is a great article! Definitely the sooner the better. I’m hatching a strategy with my girlfriend these days to figure out a way to pay off our student debt.

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