Make decisions as a family who should contribute to a TFSA or RRSP: AMS Wealth's Salgado
When Pablo Mhanna-Sandoval received his offer of admission for law school in the spring of 2022, he immediately started securing a student line of credit.
“I initially took out a line of credit as an insurance to make sure I had some liquidity down the line in the last two years of my degree,” said Mhanna-Sandoval, a first-year law student at McGill University.
“But I thought I might try to get ahead and put it towards something more than just my rent.”
After probing his finances further, he decided to put the debt to use by maxing out his tax-free savings account (TFSA), where he could hope to make more money from the investment than it cost to pay interest on his line of credit.
Though Mhanna-Sandoval’s use of his line of credit may not be a conventional one — particularly for those who may need to reserve theirs for necessities such as tuition, rent and books — some financial experts say it can be a good way for young people to get a head start on their financial futures.
"It's great to start to think about as a student, because you’re starting to set the foundation for investing and smart financial decisions,” said Natasha Macmillan, director of daily banking at Ratehub.ca, an online comparison platform for interest rates.
Nevertheless, she noted there are a number of things to keep in mind when considering whether to “invest with debt” — most importantly, whether your investment’s interest rate is likely to outpace or fall behind that of your line of credit.
“I’d really recommend speaking with a personal investment adviser who can kind of ensure that you’re looking at things accurately, because the last thing you would want is inadvertently paying more interest than you’re actually making on your TFSA,” said Macmillan.
Currently, most Canadian banks charge interest rates at the Canadian prime rate of 6.7 per cent, though some may charge more depending on the degree they are pursuing.
Macmillan recommended “shopping around” when choosing a line of credit if looking to invest with it, as many smaller banks and credit unions may offer more competitive rates.
“There's a lot of different platforms that allow you to compare where you can get the best rate,” she said.
“Doing your research before going down this route is really the best advice I can give.”
Macmillan emphasized that a student’s personal circumstances, including whether they can afford to go without a portion of their line of credit for an extended period, are also important to consider.
Students in professional fields, who often receive student lines of credit in the hundreds of thousands of dollars — considerably more than those enrolled in bachelor’s or master’s programs — may therefore be in a better place to use their loans for ventures beyond basic living and school expenses.
“If you’re running tight on cash, you don’t want to be taking out of your TFSA, because then you lose the whole benefit of it — since once it’s out, it’s taxed,” she added.
As a law student, Mhanna-Sandoval was able to secure a $150,000 student line of credit with no co-signer. Alongside factors including his lower cost of tuition as a Quebec resident, scholarships from his bachelor’s degree, and his part-time job as an army reservist, maxing out his TFSA at $6,500 was a realistic possibility, he said.
After speaking to friends, family, and consulting a few financial blogs, he chose to invest in an index fund that he hopes will accrue seven to 10 per cent in interest over the next decade. Compared to the 6.7 per cent interest rate on his line of credit — which he has been able to pay off each month thanks to the monthly dividends he receives from his investment — he said things have been looking up, despite the risk of a recession.
“I’m really comfortable with my decision, even though it can be tough to watch the (investment value) go down every now and again.”
Macmillan also cautioned against using a student line of credit to invest in anything that requires regular repayments as particularly risky — especially property.
“If you end up over-borrowing, you’ll have interest payments racking up over time, and that’s harder to pay off as a student without a full-time job or steady income,” she said.
“What I would recommend is opening a tax-free first home savings account, so you can have the pro of starting to build that account over time and contribute to a property investment without the riskiness of investing in a property itself.”
Mhanna-Sandoval has yet to decide how he plans to spend the results of his investment — or whether he will use his line of credit to max out his TFSA once again this year — though he hopes the portfolio income could go towards purchasing a home at some point down the line.
“Home ownership is the dream of anybody and everybody that I talk to my age these days, but it’s almost a fantasy because of the ridiculousness of prices,” he said.
“But what I hope to do is put away enough money, and that if I’m responsible and smart, I might be able to live the dream I've been sold.”
This report by The Canadian Press was first published Feb. 7, 2023.