Pay Off OSAP ASAP?

Hey guys.

Here's my situation. I'm graduating in April '08 from University and have about $16k of OSAP in total from my 4 years in university. I will have about $25k of savings (some in high rate savings, some in mutual funds) when I graduate. I am also expecting to be earning $50-60k in gross income afterwards. I do plan on getting my MBA after 2-3 years I start working FT, but it should be covered by my current company.

Do any of you recommend paying off OSAP in full as soon as I can (as soon as I graduate), or should follow the monthly payment schedule?

Assuming the OSAP interest rate is approx 8.5-9%, is it better to pay it off asap... or use my money and try investing for a higher return?

From what I can tell, I should probably pay off OSAP in full as soon as I graduate... but maybe you guys have better insight!

If you guys need more info on the situation to make a better recommendation, let me know what you need!

Thanks.

EDIT:

- I have no other debt whatsoever.
- Changed the new interest rate... now 8.5-9% thanks BBQPorkBun

I doubt your investments guarantee a 7% return, so not paying off your debt would be equivalent to investing on margin.

Definitely pay off your debt ASAP, then worry about putting money back into your investments from your income.

Originally Posted by born2be_lazy

Assuming the OSAP interest rate is approx 6-7%, is it better to pay it off asap... or use my money and try investing for a higher return?

Well the interest on your student loan generates a tax credit so the effective rate is less than the posted rate.

7-(7 x (15.5 fed + 6.05 prov))= 5.4% effective rate. 6.05 is the prov rate for ON.

Readers in other provinces would adjust for their prov rate. For example the rate where I live is 11% so based on the same 7% my effective rate would be 5.14%.

So if you could get an investment that guaranteed more than 5.4% after tax then that investment would be better than paying off you loan.

If you have any other debt with a higher rate paying that off first would be better.

Also keep in mind your future purchases. If you plan on buying a car when you are done school it would make no sense to borrow at 7% to buy the car and pay off your SL. You'd be better off paying cash and keeping the lower effective rate SL.

Originally Posted by codex

I doubt your investments guarantee a 7% return, so not paying off your debt would be equivalent to investing on margin.

Definitely pay off your debt ASAP, then worry about putting money back into your investments from your income.

Remember that OSAP interest is tax-deductible. So your 7% will end up costing you below 5 probably. That should be VERY easy to beat by investing, over the longer term. Therefore, I disagree with codex, but do your math in terms of how much exactly your after-tax effective interest rate on the OSAP is.

Edit: Oops, i just noticed the post above seems to indicate 5.4%, but my conclusion still stands.

Interesting point about the car purchase... never thought about that.

Although I think I'll be waiting a year or two before I buy my first car after I graduate.

Lets keep in mind osap interest is 8.5% and looks like its going up from how the market trends look.

Yeah, I don't know where the OP is getting 6-7% from...osap's variable rate is currently 8.5%. Might go a bit higher now that bank of canada's interest rate just went up 0.25% and even more in the near future.

Originally Posted by born2be_lazy

Hey guys.

Here's my situation. I'm graduating in April '08 from University and have about $16k of OSAP in total from my 4 years in university. I will have about $25k of savings (some in high rate savings, some in mutual funds) when I graduate. I am also expecting to be earning $50-60k in gross income afterwards. I do plan on getting my MBA after 2-3 years I start working FT, but it should be covered by my current company.

Do any of you recommend paying off OSAP in full as soon as I can (as soon as I graduate), or should follow the monthly payment schedule?

Assuming the OSAP interest rate is approx 6-7%, is it better to pay it off asap... or use my money and try investing for a higher return?

From what I can tell, I should probably pay off OSAP in full as soon as I graduate... but maybe you guys have better insight!

If you guys need more info on the situation to make a better recommendation, let me know what you need!

Thanks.

EDIT:


- I have no other debt whatsoever.

Fast question osap gave you a student loan even through you had 25 grand?

Did they know
?

Originally Posted by myapple

Yeah, I don't know where the OP is getting 6-7% from...osap's variable rate is currently 8.5%. Might go a bit higher now that bank of canada's interest rate just went up 0.25% and even more in the near future.

Oh yeah I really didn't look into what the rate would be. So 8.5% and upwards is a better benchmark. Either way, any advice? =)

Originally Posted by J_u_n_i_o_r_3

Fast question osap gave you a student loan even through you had 25 grand?

Did they know
?

OSAP stopped giving me a loan this final year because I'm working in the summer and my brother is no longer a dependant child. I'll also be earning about $2-3k during the school year from grading papers and such. So that $25k is from previous osap, bursaries, this summer's earnings, and the school year's earnings + investments using osap $$ lol.

Thanks for posting this, born2be_lazy.
I'm kinda in the same situation. I'm in BC, and I have enough to pay off my BC student loan, but not the federal student loan. So I was also asking myself the same question, pay off BCSL entirely, or invest and make the monthly payments for both the loans.
The interest on the loans are tax deductible, but how much do we get back (credit from fed, or BC)?
I don't have the literature on me (doing a search now), but I'm hearing 17%, or by multiplying the lowest federal/provincial/territorial tax rate by the amount of the loan interest.

pay off your loans asap .... the longer you let them continue to earn interest the more you will owe on them. Also if you pay off a large loan quickly it also looks good on your credit rating that way if you go to get another loan or go to buy a car it will make it easier on your aproval for it.

As for the bc person .... defiantly pay off the 1 that way if your left with the other 1 that is 1 less to be paying on. 1 loan payment is better then 2

I'm sort of in the same boat, but really don't understand much about my options.

- I have a $14,000 OSAP loan right now, and just graduated at the end of April.
- I was pre-approved for a $26,000 LOC with TD with prime+2% (i.e. 8.25% now since prime just went up).

Questions:
- at what rate does OSAP charge me their interest?
- would I be better off paying OSAP back all at once and gradually paying my LOC with the bank, or should I just make my monthly payments to OSAP once the 6 month grace period is over?
- I'm currently in the process of getting a job right now, so I don't really have any lumpsum that I can put towards my OSAP loan right now.

... any advice?

I think it's prime + 2.5%.

You can get a tax credit on your student loan interest, but not on the LOC.
So your effective rate is a bit less (see the posts above). This means you might finish paying off your student loans faster than your LOC (if all things are equal).

Thanks, terrybear. I want to get rid of as much debt as possible, but I want to make sure I'll be financially sound.

Originally Posted by born2be_lazy

So that $25k is from previous osap, bursaries, this summer's earnings, and the school year's earnings + investments using osap $$ lol.

So you've been loaned money interest free (until you graduate) that you didn't need. Regardless of whatever else has been posted here, the ethical thing would be to pay it back immediately. Your interest-free period is being subsidized by taxpayers, who assume this money is being loaned to students who actually need it, not for investing and profiting from.

Originally Posted by tigger03

I'm sort of in the same boat, but really don't understand much about my options.

- I have a $14,000 OSAP loan right now, and just graduated at the end of April.
- I was pre-approved for a $26,000 LOC with TD with prime+2% (i.e. 8.25% now since prime just went up).

Questions:
- at what rate does OSAP charge me their interest?
- would I be better off paying OSAP back all at once and gradually paying my LOC with the bank, or should I just make my monthly payments to OSAP once the 6 month grace period is over?
- I'm currently in the process of getting a job right now, so I don't really have any lumpsum that I can put towards my OSAP loan right now.

... any advice?

Keep it with OSAP for sure. After tax, the rate with them is better, and it also gives you far more flexible payment options if you ever run into trouble.