Which is Smarter: An RRSP or Paying Your Student Loan Faster?

A Debt 101 Calculator Article

 
When you start working -- and paying off your student loan – people may tell you to invest money in an RRSP (Registered Retirement Savings Plan).
 
RRSPs are popular because they let you save on your current income taxes while you save money for retirement.
 
Sounds good. And it is good. But should you spend your money on an RRSP when you still have student loans to pay off?
 
After all, when you owe money, the best ‘investment’ is usually to pay your debt faster.
 
Here's why:
 
Extra payments on your debts save you money in interest charges.. That ‘return on your investment’ is guaranteed and tax-free.
 
So if you have student loans, it might be smarter to pay off your loans faster and start your RRSP after you’re out of debt.
 
But not always…
 
You might do better with an RRSP if your student loans have low interest rates. You might also do better with an RRSP if you’ll make a high investment return or high tax savings on the RRSP.
 
But how can you really know?
 
Enter Debt 101’s custom calculator: RRSP or Extra Student Loan Payments. If you can ‘invest’ some extra money each month, compare the returns you’d get from that money.
 
The 'return' on your extra student loan payments is the money you’d save on interest costs.
 
The 'return' on your RRSP investment is the money you’d get from income-tax savings plus what you’d earn from your RRSP investment.
 
If, by some miracle, you’d get the same results from either one, put your spare cash toward whichever makes you happier (retirement savings or faster debt payoff).
 
Otherwise, invest where you'll get the most ‘bang’ for your buck! Your strategy may change if interest rates change or you get a promotion. But you can use this calculator to help you decide that, too.