Student Debts and RRSPs

[Tadrith]

It's not as much of a dilemma as it seems: the principal is simple- pay it down ;)

The dilemma I have is whether or not to dip in to my RRSP to help pay down my debt. I have around $30,000 in my RRSP and $43,000 remaining on my student line of credit. My LoC is sitting around 6.5%. My RRSP, established before finding this site), is achieving around 5.5%, including the MER (around 2.13%!). I'm currently making payments near $2,500/month to my LoC ($0 to my RRSP), soon to go up to $3,000.

It seems simple, but if I make an early withdrawal from my RRSP, I'll have to pay a withholding tax of around 30% (which would wind up being around $9,000 in taxes), all to save around $2,000 in interest payments.

The numbers suggest that it is better to not touch my RRSP and just keep on paying down my LoC as fast as I can, but this seems to run counter to the principle of getting out of debt as soon as you can.

Any thoughts?

[GetItRight]

I didn't run the numbers but if that's how it works out then don't touch the RRSP or the government steals all the savings from paying off the debt faster. Personally I had student loans at 14% and borrowed from my 401k to pay down a chunk of them and get the situation well off enough that I could refinance. Now it's all below 5.75%, but there were no taxes from doing a 401k loan, only 4% interest paid back into the 401k and whatever lost gains on the money borrowed.

If you can do a loan on an RRSP (not familiar with those) it might make sense, but paying consumer debt at 6.5% with money taxed at an additional 30% would not be the way to do it. I'd suspect if you lost your job and couldn't find work you could withdraw at 30% tax rate from the RRSP to pay the student loans at that point? If so at least you can feel nice to have a bit of a safety net.

[SaintM]

If you can't get out of the 2.13 expense ratio, you might be better off closing the whole thing.  You will lose more than 30% over the life of the plan.

[Tadrith]

Hi GetItRight,

I think RRSPs are similar to the 401k; it's a tax deferral system. If I withdraw money from my RRSP early, it will be added to my current salary and then be taxed at the appropriate rate (which, given my salary, will wind up being around around 30%).

I think I might look to take out a loan at a lower interest rate to pay off this much higher student line of credit.

Thanks for the insight!

[Retire-Canada]

Here are my thoughts:

- leave the money in your RRSP, but transfer to a higher return/lower MER investment
- you can never put the money you take out back into a RRSP, but you can transfer the money to another RRSP account
- try and refinance the LOC to a lower rate and pay it off as fast as you can
- RRSP contribution room is not lost if you don't use it so not contributing isn't a problem in the short term

-- Vik

[daverobev]

Don't take money out of your RRSP, you lose the room forever. And as you say, you'll cease to defer tax on that money - wait til a year you're in a low bracket to take anything out.

See if a bank will give you a lower rate. Also, get an MBNA Platinum Plus card (I think there is a rebate from GCR if you get one - see link in my sig), it is 0% for a year - so you could do a deposit to chequing (NOT the same as a cash advance!), and pay that off over the year as well.

At 6.5%, throw everything at the loan, but don't touch the RRSP except to move it to a Canadian Couch Potato portfolio.

You may want to research into not putting too much into your RRSP... Make sure you don't pay MORE when you withdraw than when you put in (OAS/CPP etc; if you're planning on FIREing you can take money out before that kicks in).

[Cathy]

As Vikb and daverobev point out, the key in many of these threads is recognising that refinancing loans is often possible. Often people post these "Should I pay off my 15% student loan or invest?" threads and they want to compare the potential return of the investments to 15%. Instead of doing that, you should compare the potential return on the investments to the rate that you can refinance the loan into.

In other to determine what kind of refinancing makes sense, we'd need to know about your free capital per month. If you can pay the loan off within a year or two, you could gamble with margin rates from Interactive Brokers (< 2%) on the theory that they are unlikely to go up much in the short term. If you can pay it off within a year, you could probably even get a 0% credit card balance transfer for all or most of that loan balance (as daverobev mentions).