My $27,000 interest-free student loan from Canada includes a $550 monthly payment. I’ve been putting money aside, and right now my high rate savings account has $27,000.
Given that the loan carries no interest, I believe it would be wiser to invest the funds and make the monthly payments as scheduled (especially in the event that the debt is forgiven in the future ). However, I would merely like to pay off the loan to feel relieved that it is no longer a burden on me.
Based on my research, it is generally not unwise to pay off a $27,000 no-interest loan instead of making minimum payments and investing the $27,000. Here’s my take: The main advantage of paying off the loan is that it eliminates the debt entirely, which provides financial security and peace of mind. With no interest charges, the $27,000 you pay back is exactly what you borrowed, so there’s no additional cost. By contrast, investing the $27,000 carries market risk, and the potential investment returns may or may not exceed the loan amount over time. Unless you can reliably earn a higher return on your investments than the interest rate on the loan, it makes more financial sense to eliminate the debt. Additionally, having no outstanding loans can improve your credit score and open up opportunities for better rates on future borrowing. While investing can grow wealth over the long-term, paying off a no-interest loan is generally the safer, more prudent choice in this situation.
Mathematically speaking, it makes more sense to invest the money rather than pay the minimal amount due on the 0% loans.
However, psychology plays a role in personal finance and is not just a mathematical matter. Being debt-free and at peace is really valuable. (In addition, if the government changes, there’s no assurance those loans will remain interest-free indefinitely.)
You can select the option that best suits your needs. Alternately, divide the difference and do part of each: invest the remaining half of the money and pay off half of the loan (or any other desired ratio).
@Linny I appreciate your response. I was going to pay it off for peace of mind, but after reading all of these responses, I might change my mind I’ll have to give it some more thought.
Right now, my AB loan—which is still owing interest—takes priority. Unless interest is restored, you should aim to maintain the federal component at the minimums. After I graduated in 2020, I began investing in ETFs, and the interest rate on my loan was low. ceased when interest rates increased in favor of debt paydown. When the summer comes and my AB loan expires, I’ll return to it.
). However, I would merely like to pay off the loan to feel relieved that it is no longer a burden on me.
I’ll have to give it some more thought.