By the time I graduate with my BA in Professional Writing, I will owe about $56,500 in student loans.
Over the course of a 15-year student loan repayment plan, that balance would rise to almost $81,000 if you use todays interest rate of 3.95%. That’s only $19,000 short of a six-digit debt balance (yikes!). The situation is bleak regardless, but with a little planning and the help of Wealthsimple, I can actually expect to shave over $12,000 off my accumulated interest, as well as 2.5 years off my repayment plan.
Before I go on, let me add a small disclaimer: I came from a lower class family and have received a fairly small amount of financial support from my parents. Although I’m incredibly grateful for the couple of grand they’ve spared to go towards my tuition, it’s certainly not the amount that many of my peers seem to be blessed with. That combined with endless bad luck (an expensive health-related journey in my teens, the cost of rent in Toronto, tuition at an all-time high, etc.), I simply would not be able to attend school without government financial aid. I’ve accepted this dismal reality, but that doesn’t mean I’m not constantly thinking about how to pull myself out of debt once I graduate.
My student loan process
I take the maximum amount of government loans I’m approved for each semester. This amount varies, but it’s usually between $12,000 and $15,000 for a full school year. My totals so far have been $15,000, $12,615, and $14,840 for each year, totaling $42,455 for the three years I’ve completed. I can assume another $14,000 for my final year, which means I will have borrowed $56,455 by the time I earn my degree.
After receiving my student loan funding each September, I sit down and subtract a year’s worth of rent and stash that amount in a high-interest saving account. I use the remainder of the loan to pay off my tuition and fees for the school year. With my two biggest bills, housing and education, taken care of, I can use any extra money I earn however I see fit.
Using a trusty TFSA to lower my balance owing
I have a strict budget and rarely spend any money on unnecessary expenses. I also am working multiple jobs while in school and I know these will both lessen the weight of my “balance owing” later on. However, the most important plan I have in order to lessen my student loans is making the most out of my trusty TFSA.
My Wealthsimple account is more than anything a tool to use to pay off my student loans in the future. Although I’ve recently taken a small break from investing, I plan for $30/month to be deposited through my round-up savings. Once I start my regular deposits up again, that’ll be an additional $50/month.
This may not sound like a lot, but I wili have deposited $1,680 by the time I graduate. My current rate of return on my Wealthsimple account is 5.3% and if that continues, the balance will grow to $1,800 on graduation day. I understand that the stock market is unpredictable, but a 5% return is a pretty modest expectation so I’m optimistic!
But here’s the fun part!
Because my student loans pay my housing and education costs, I now have the opportunity to use more of my paycheque towards my Wealthsimple account. I’ve put all other financial goals aside to focus on this. Instead of saving for a down-payment or furthering my investment portfolio, I stash away any extra money I have at the end of the month.
This coming September when my loans come in for my final year, I’ll do my usual subtractions:
$14,000 – ($650 (my monthly rent) x 12) = $6,200 – $6,200 in tuition & fees = $0
Now that I have rent and tuition paid, I plan to make a large one-time deposit into my TFSA with the money I saved over the summer. As of now, I expect to have $4,550 of my earnings freed up thanks to student loans. Adding this to my $1,680 I’m expecting to deposit over my final year, I’ll have contributed $6,230 into Wealthsimple by the time I graduate.
At the current return of 5%, I’m hoping to have at least $6,800 in my TFSA by the time I graduate. Considering the short amount of time I let the money sit in the account, that $570 of free money seems more than okay to me!
How does this affect my student loans repayment plan?
I actually took a year off school between my second and third year. After the six-month grace period, I was unfortunately expected to start my repayment plan. For two terrible months, I paid $450 per month toward my student loans. I’m basing the following calculations on that repayment plan.
None of the calculations in this article will be perfect! Not only am I a writer foremost and mathematician second, but we’re also dealing with interest, fluctuating prime rates, estimated deposits, and more unpredictable factors.
I’ll also be basing the interest rate accumulation on the current prime rate in Canada, which is 3.95% at the moment. My loans are from Alberta, which uses CIBC’s official prime rate for the interest accumulating on student loans. However, many provinces differ from the prime rate when it comes to student loans, so be sure to know what your rate is.
Let’s take a look at my repayment plan:
If I owe $56,455, starting after my six-month grace period with payments of $450/month, imagine I put my expected $6,800 Wealthsimple balance towards my student loans the second I graduate. My balance owed would then drop to $49,655 immediately. At $450/month, this new balance would gain approximately $18,630 in interest (at prime) over a 12.5-year repayment plan. This saves me over $12,000 from the first calculation! It’s almost a 200% return on that $6,800. Not to mention 2.5 years freed up.
$56,455 + $24,500 in interest at 3.95% = $80,955 taking 15 years
$49,655 + $18,630 in interest at 3.95% = $68,285 taking 12.5 years
When all is said and done, depositing a mere $6,230 into a TFSA over the next 21 months has the potential to save me $12,670 and a full 2 ½ years of living with debt. That definitely seems worth it to me!
Something to keep in mind: this isn’t including the potential the Wealthsimple has to help me knock down my student loan repayment after graduation. I plan on emptying my account in order to have the most impact on my loans, yes. But I will definitely continue my deposits. Who knows, maybe I could make another $6,800 deposit one day and save another $12,000. A girl can dream, right?