I want to do X, but I have to pay back my student loans

July 15, 2019

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I logged into my student loan account last week, strangely nervous to see what kind of financial situation I was in when it came to my loans. I’ll admit it: I hadn’t logged into the site in about a year and I actually had to call their help center to retrieve my password. I knew that a payment was taken from my chequing account on the last day of each month and that I had to ensure I had enough money to cover it, but otherwise, I didn’t know much.

While I was still in university, I was aware that I was racking up student loans, but they didn’t seem real to me at the time. If you live in Ontario, you don’t get charged interest on a government-issued student loan until you graduate, and you don’t have to start paying it back until several months after that. I knew the number after the dollar sign was growing, but life seemed great, and loans seemed like a worry for future Jana.

Fast forward to now; meet two-years-post-grad Jana. Loans are definitely a pretty large part of my life—well, a large part of my expenses at least—and figuring out how to live the life I want AND get rid of the debt isn’t as straightforward as I had anticipated.

For most of us who are fresh out of school, our student loan is our first real loan. And loans operate in the opposite way from how most of us have been functioning up to this point. We’re used to this concept of “first you pay and then you get.” You pay at Tim Horton’s and then immediately after you get your dark roast. You pay for the shirt that brings out your eyes and then you get to wear it to a party where it does in fact make your eyes sparkle. Even if you do pay after eating at a restaurant, it’s pretty soon after and you’re still full and your jeans are still tight.

Enter the student loan. By the time you start paying for your education, you’ve already received it and have moved on with life. Although you’re ideally still benefitting from your time at school, you start paying for it months after leaving school, and paying back the loan can take up to 10 years, or sometimes even more. That leaves you with a whole decade to wonder whether the decisions you made and continue to make are wise. And, well, that’s a long time to be worried. So, let’s figure out the best course of action.

Financially speaking, paying back your student loan should be a priority.

Government-issued student loans are awesome—they give those of us who need the funding the ability to get educated. The interest rate isn’t super awesome though. Let’s talk numbers for just a second:

The interest rate on a government-issued student loan is floating prime plus 2.5%. At this moment, that means that if you were a student in Ontario, you’re being charged 6.45% interest (because it’s floating, it changes with the market).

If your student loan is currently around $25,000 and you’re paying back the pre-set amount (this is what you’re paying unless you specified that you want to pay a different amount), you’ll get charged over $1,500 of interest... just this year. If you stick to paying the pre-set amount for the typical 10-year life of your loan, your interest will likely total around $9,000 by the end. Which is a whole lot of interest for a $25,000 loan. Adulting is fun, right?

But do not fret! You can use the government’s Loan Repayment Estimator to play around with the numbers and see what works for you, since you’re able to increase and decrease payments, and pay in lump sums—which means, maybe less interest.

Why should you prioritize paying off student debt? Every dollar you earn can be allocated in 1 of 3 ways: to pay off debt, to buy something now, or to save/invest. The reason to prioritize paying your student loan after paying for other living expenses is because there’s a cost to your debt—the interest mentioned above. So, generally speaking, if the return on your savings/investment is lower than the interest rate on your loan, putting that dollar you earned into your savings is actually causing you to lose some money. Does that mean you shouldn’t save at all or that you should become an investment banking whiz who exclusively yields only high returns? I wouldn’t recommend it.

Your personal finances should exist to support the life you’re living and the life you plan to live. You don’t exist to support your finances.

After my recent login to my student loan account, the question of whether I should solely focus on paying off my student loans was pulsing in my mind. So I met with Libro Coaches Debra Cottingham and Chris Greco. They agreed that paying off student debt should definitely be a priority, but that it’s about creating balance. “Paying off your student debt enables you to have more financial freedom, but so does putting money in a tax-free savings account or towards your pension, or whatever it is that matters to you,” Chris said.

Looking strictly at the numbers, it might make the most sense to pay off as much student debt as possible right now, but that only makes sense if getting charged the least amount of interest possible is your ONLY goal. You likely have other goals that require you to be in different financial situations, whether they involve travelling, buying your first home, getting your dream car, being able to invest the way you want, or whatever prosperity means to you (check out this tool to help you plan out your goals). And those goals are just as valid—if not more—than an interest rate that stresses you out.

The main lesson is this: know your interest rates so you’re not surprised (aka. actually log into your student loan account more than once a year), think about what your goals are, and create a game plan for how you can financially support your goals in the best way possible. We’re young, and now is as good of a time as ever to be chasing our goals. But while we do that, we need to be setting up a good foundation and habits that will allow us to keep on chasing in the future.

By Jana Galat, Marketing Administrator