I’ve finally pulled the trigger!
I know I had been saying that I will refinance my student loan since last year and did nothing about it.
I am glad to finally confirm that I had taken action and refinanced my OSAP (Ontario student loan) last week.
Despite contrary beliefs to repay student loans through OSAP, I believe that refinancing my loan is the better option. Here is my reasoning:
The most obvious reason for refinancing my student loan is the reduction of interest that I will be paying.
Instead of paying an annual interest rate of 5.2% to the government, I will now be paying a rate of 3.2% to the bank.
However, this comes with a price. I will no longer have any insurance that accompanies OSAP. In situations where I lose my job, OSAP will forgive interest for a few months and banks will not.
I still believe that the pro outweighs the cons.
The best time to pay off good debt is never
To me, good debt should never be paid off until cash equivalency is at least 10x. In my specific case, I still owe the bank $15,000. This means that I will be paying off my loan in its entirety once I have at least $150,000 cash.
At an interest rate of 3.2%, I will consider this debt a good one and I will have no intention to paying it off any time soon. This means that I will be only paying the minimum every month (just the interest) and I will not be making any payments towards the overall sum.
My previous arrangement with the government did not allow me with this option. I would have to pay a monthly sum of the interest alongside to knocking some of the balance off. My loan had a maturity date.
As for my loan with the bank, I can choose not to pay it off forever if that is what I want.
Leveraging to the max
The reason why I choose to pay only the interest is because I believe that cash is extremely important in my early financial game.
The more cash I can leverage into wise investments; the sooner I would be able to retire.
After doing some quick calculations, this method will allow me to save an extra $3,000 in the first year to contribute to some other investment.
This may not seem like much but I think taking the first step to applying the principles that I learn is what really counts.
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