Got student debt? Don’t even think about investing

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Curb your enthusiasm, young investors.

I've run several personal finance sessions on university and college campuses lately and am struck by how many young people want to know about investing. It's hugely impressive and encouraging, but also a bit premature in many cases. Anyone who has student debt should devote all their resources to getting it paid off, rather than investing. Parents, please pass this message along to your 20-something kids.

Some young people think they can earn a higher rate on their investments than they're paying in interest on your debts. This seems optimistic. Fixed-rate borrowing under the Canada Student Loan program is set at prime, now 3 per cent, plus 5 per cent, while floating rate loans are set at prime plus 2.5. Some sharp young minds point out that the interest paid on borrowing through Canada Student Loans generates a tax credit, and that this can create a lower after-tax cost of borrowing. I still say pay the loan off first.

Using money to pay down debt offers a guaranteed immediate benefit, while investing often requires a long-term perspective to realize benefits. The stock markets have been hugely volatile in recent months. If you put money into stocks just before a downturn, it could take a few years to recover what you lost. That's not an issue if you're investing for retirement and have 35 years until you'll need your money. But if you're expecting a quick benefit to validate your decision to invest, you could end up discouraged and tempted to sell your stocks to prevent further losses.

Keen Gen Y investors may also be over-estimating the returns they'll get as investors. Young people are well-positioned to invest aggressively and capture the stock market's potential to deliver high single-digit returns over the long term. And yet, many millennials invest fairly conservatively. They've seen the stock market fluctuate wildly since 2008 and have trouble trusting it. With interest rates as low as they are these days, a portfolio with heavy weightings in bonds or GICs might deliver returns in the low single digits. Advantage, loan repayment.

Paying off student loans is the ideal prelude to setting an investment program. You're used to giving up a certain amount of your paycheque to cover your loan payments. If you direct all or most of this money to investing, you won't have to make any new sacrifices in your lifestyle. The enthusiasm of young people to invest is a very positive development, but let's not rush things. Debt first, investing second.