Low rates and tax deductability prompt some to invest over paying down student loans

When the federal government set the interest rate for federal student loans at zero and provincial interest rates were set at a low 3.5 per cent in Ontario, Chantelle Gubert decided it was a perfect opportunity to divert more money toward her long-term savings.

"What I've come to realize isI have enough of an investment that if my investment does better than about 4.5 per cent right now, that it actually makes more sense long-term for me to invest into that," said Gubert, who is in her twenties and lives and works in downtown Toronto.

She's now adding more funds each month into a tax-free savings account, after she previously tried to pay off as much of her loan as possible through a second job in the restaurant industry before the pandemic.

"The student loan is going to be there forever and the interest is tax deductible, but you don't have forever 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 per cent until 2023, which some financial planners say could be an opportunity for young Canadians to look at diverting money into long-term saving plans for things like retirement.

Jason Heath, managing director of the fee-only financial planning firm Objective Financial Partners, said Canadians could look to the federal government's announcement as an opportunity to invest, but they'd need to be confident that 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 shares that people think they can make a killing on," said Heath, who is based in Markham, Ont.

"If someone takes a risk with money that they would have otherwise put toward paying down their student debt, they may regret it in the future and 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 pension matching program with a workplace.

He said the low interest rate could also help people who need the cash flow to pay other high interest debts they may be dealing with, such as credit card debt.

One of the proposals in the 2021 federal budget is stipulates that Canadians will only be required to make student loan payments if they're making more than $40,000 per year up from the previous threshold of $25,000. Heath said that could be another opportunity for people to deal with high interest debt first.

Ian Collings, a fee-only financial planner based in Vancouver, agreed that using low interest rates for student loans to leverage investments could be a good way to move your financial life forward.

But he said people should be aware that the rosy picture around student loan repayment could change down the road.

"It's possible to get used to not having that bill and not having to pay off the debt," warned Collings.

"When 2023 or 2024 rolls around there's not a continuation of that program, having that bill show up again could be a surprise."

Back in Toronto, Gubert said her plan will require her to keep an eye on her investments, and she'll be watching whether the provincial interest rate for her student loan changes.

"It's just about trying to predict what my long term gains are going to be, but interest rates will be a hard thing to predict too," said Gubert, who said the projected post-vaccination economic boom could change her situation.

"It's a bit of a balancing act I'll have to do my own due diligence."