MONTREAL 鈥� 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.
鈥淚 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,鈥� said Mhanna-Sandoval, a first-year law student at McGill University.聽
鈥淏ut I thought I might try to get ahead and put it towards something more than just my rent.鈥�
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鈥檚 use of his line of credit may not be a conventional one 鈥� particularly for those who may need to reserve theirs for necessities such as tuition, rent and books 鈥� 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鈥檙e starting to set the foundation for investing and smart financial decisions,鈥� 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 鈥渋nvest with debt鈥� 鈥� most importantly, whether your investment鈥檚 interest rate is likely to outpace or fall behind that of your line of credit.
鈥淚鈥檇 really recommend speaking with a personal investment adviser who can kind of ensure that you鈥檙e looking at things accurately, because the last thing you would want is inadvertently paying more interest than you鈥檙e actually making on your TFSA,鈥� 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 鈥渟hopping around鈥� when choosing a line of credit if looking to invest with it, as many smaller banks and credit unions may offer more competitive rates.
鈥淭here's a lot of different platforms that allow you to compare where you can get the best rate,鈥� she said.
鈥淒oing your research before going down this route is really the best advice I can give.鈥�
Macmillan emphasized that a student鈥檚 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.聽
Students in professional fields, who often receive student lines of credit in the hundreds of thousands of dollars 鈥� considerably more than those enrolled in bachelor鈥檚 or master鈥檚 programs 鈥� may therefore be in a better place to use their loans for ventures beyond basic living and school expenses.
鈥淚f you鈥檙e running tight on cash, you don鈥檛 want to be taking out of your TFSA, because then you lose the whole benefit of it 鈥� since once it鈥檚 out, it鈥檚 taxed,鈥� 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鈥檚 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 鈥� which he has been able to pay off each month thanks to the monthly dividends he receives from his investment 鈥� he said things have been looking up, despite the risk of a recession.
鈥淚鈥檓 really comfortable with my decision, even though it can be tough to watch the (investment value) go down every now and again.鈥�
Macmillan also cautioned against using a student line of credit to invest in anything that requires regular repayments as particularly risky 鈥� especially property.
鈥淚f you end up over-borrowing, you鈥檒l have interest payments racking up over time, and that鈥檚 harder to pay off as a student without a full-time job or steady income,鈥� she said.聽
鈥淲hat 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.鈥�
Mhanna-Sandoval has yet to decide how he plans to spend the results of his investment 鈥� or whether he will use his line of credit to max out his TFSA once again this year 鈥� though he hopes the portfolio income could go towards purchasing a home at some point down the line.
鈥淗ome ownership is the dream of anybody and everybody that I talk to my age these days, but it鈥檚 almost a fantasy because of the ridiculousness of prices,鈥� he said.
鈥淏ut what I hope to do is put away enough money, and that if I鈥檓 responsible and smart, I might be able to live the dream I've been sold.鈥�
This report by The Canadian Press was first published Feb. 7, 2023.
Pascale Malenfant, The Canadian Press
