Personal Finance

To pay back OSAP loans now or later?

  • Last Updated:
  • Sep 19th, 2008 8:56 am
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[OP]
Jr. Member
Sep 16, 2008
168 posts
9 upvotes

To pay back OSAP loans now or later?

I graduated in June 2008. Graduation gifts, some savings, and my summer job netted me enough money to pay back my undergraduate OSAP (student loan for school) loan. The amount of the loan is approx. 20K.

The cash is currently sitting in the bank account (ING) earning interest.

I started graduate studies this month and my OSAP loan is "in-study" status meaning that I have no interest charges on my account while I am in full time studies. So I don't have to start paying back the loan until two years from now when I finish my masters. I am not taking any further loans for graduate study.

OK. So that was the background. Here is the dilemma.

My mum is worried about what might happen in Canada given the current state of affairs with the buyout of those financial institutions in the US. So she's encouraging me to pay back the loan right now so I have no debt and I would not have to worry about any unforeseen trouble, whatever that may be.

On the other hand, that means I lose the interest I can be earning for the next two years. She is thinking if something does happen to our financial institutions here in this country and I lose access to my money then what do I do? Can it happen? Can CDIC really insure my money? Could the lenders behind OSAP all of a sudden insist immediate repayment of their loans even if I am still in school? What should I do...
7 replies
Deal Addict
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Nov 14, 2006
1755 posts
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Kitchener
You're in school and your loans are in interest-free status? Why pay them off now...

Keep your money in your savings account and pay it off the day you finish your Masters studies. CDIC will cover your savings up to C$100,000 in the extremely unlikely event that ING goes belly up.

Hell, if you knew for sure you're in your Masters for 2 more years, I'd even go as far as to suggest you put the amount of your student loan away into a 2 year non-redeemable GIC for a better interest rate.

See http://money.canoe.ca/rates/gics_2.html for a list of GIC rates.

Edit: I just noticed that ING Direct has a 1.5 year GIC at 4.0% interest rate. If you don't want to deal with the hassle of moving your money to another financial institution, that might be a better option for you. See http://www.ingdirect.ca/en/save-invest/gic/index.html
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Jun 19, 2006
9349 posts
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Don't know what your masters is in, but if its in a sector that's not in favour (ie: you're taking a MSEE or a MBA, or something like that), then having a good chunk of cash aside to live on after graduation is very useful.

So yeah, stick it in something CDIC-insured (not credit union 'deposit insurance').
Member
Jun 5, 2008
269 posts
Toronto
I am in a similar situation, I will have almost enough to pay the loan back after teaching English for a year in Japan. My Balance owing is around $18,000.

I think about it this way, If I were a business how would I want my finances structured right now? Well I know there is a credit crunch world wide which may affect my ability get a loan. Also if the economy goes into recession then I will probably be spending a great deal of time looking for a job when I return to Canada. Therefore liquidity is very important to me. I need enough money to pay for the necessities and I can't trust that the banks will loan me money in a pinch. Therefore I am not paying it all back. However I have raised my minimum payment amount, which shortens my amortization.


There are a bunch of threads about paying back school loans on this board and for some reason most people don't bring awareness to the importance of liquidity when it comes to personal finances. Some people seem to think that OSAP style loans will be available to them if they pay theirs back in full. Remember OSAP offers interest relief, which means the government pays your interest for 6 months if you fall on hard time and I believe they will not ding your credit rating for this. Bank loans don't offer interest relief and often require the loan to be collateralized and contain terms stating banks can call the loan at will. Banks will also ding your credit rating if you fall out of line even a little bit. Also OSAP interest payments give you a tax credit, bank interest payments probably don't offer tax breaks.

The things I don't like about the OSAP loan are the interest rates. Mine is 7.25% under the variable scheme, however I get a tax credit which reduces it a little. In particular the fixed rate option is prime + 5% (2.5% higher then variable) which I think is a bit high, but it gets locked in forever so I guess thats the cost of certainty.
[OP]
Jr. Member
Sep 16, 2008
168 posts
9 upvotes
Thank you for the responses. I am curious about one thing regarding the CDIC? Ever since its inception has there ever been a case where are large number of people had to make a claim at the same time?
Deal Fanatic
Aug 27, 2004
6347 posts
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makethings wrote:
Sep 18th, 2008 11:31 pm
Thank you for the responses. I am curious about one thing regarding the CDIC? Ever since its inception has there ever been a case where are large number of people had to make a claim at the same time?
Has CDIC ever had to pay a claim?

In the US, it's different because there are (were?) lots of small banks that could and did go belly up, so their deposit insurer (FDIC?) has had to pay claims when those banks go up.

But Canadian banking has typically been big banks with tons of branches, and those have been stable in the past...
Newbie
Aug 19, 2006
30 posts
Don't pay down your loan now. The probability that your bank will fail is next to zero. Keep earning interest on it and if you have a higher risk tolerance by some of the bargains out there in the market right now and hold them for two years.
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Jan 27, 2004
34718 posts
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its interest free while your in school.
So keep it in some sort of short term investment like a high interest savings account, maybe even a 1 year GIC...
When you graduate, pay as much (ideally all) of your osap loan.
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