If you are trying to run a business while managing debt from your university or college degree, you aren’t alone. The average Canadian student loan debt amount is $28,000. The average Canadian student loan interest rate can range between 6.45% and 8.95%. Compounded over a 10 year period, you could end up paying anywhere between $10,000 to $15,000 more in interest based on whether your loan has a fixed or floating interest rate.
If you’re running a business while trying to pay off student loan debt, managing your monthly expenses can feel overwhelming. But there are financially prudent ways to sustain your entrepreneurial spirit and still build wealth for your future.
The first and most important step is to ensure you don’t default on your monthly payments. This will affect your credit score, and in turn your ability to qualify for credit cards, home mortgages, car loans and insurance rates.
Pay down the principal
Given that you’re able to meet your minimum monthly payments with ease, the next step is to pay attention to the breakdown in your loan document. Understand how much is going towards interest, and how much is actually going towards the principal loan amount. Your loan is typically structured to pay more towards interest than principal in the beginning. However, you can start making higher monthly payments at any time or even make lump sum payments in addition to your monthly minimums.
For example, if your minimum monthly payment is $300, and you’re paying $150 towards interest, and only $150 towards the principal, by increasing it to $500, you could be paying only $100 towards interest and $400 towards the principal. If adding $200 a month doesn’t significantly alter your affordability, it’s worth directing that towards your student loan payment. Because student loan interests are so high, even small increments to your monthly payment will dramatically bring down how much you will end up paying towards your loan in the end.
Claim tax deductions
The third step is to take stock of your financial situation. Is your business turning a profit or are you struggling to hit your annual target? If your business is currently running at a loss, make your student loans work for you. Pay the monthly minimum, and claim tax deductions on the interest you pay towards your student loans. If you’re turning a consistent profit year over year, your business has reached the point of self-sustenance and perhaps no longer needs additional funding to survive (although you might need a larger investment to scale and grow).
But a profitable company doesn’t necessarily translate to a higher personal monthly income. You could have a thriving, self-sustaining business and still struggle to make ends meet when it comes to your personal living expenses.
Prioritize based on affordability
The true dilemma of whether to reinvest in your business, pay off your student loans, save up for a vacation or for home improvement hits when your monthly income from your business (and your day job, if you have a lifestyle business) is so high that it covers all your living expenses, and then some.
Prioritize what is most important. If reinvesting the surplus into your business down the line will reap more profits, it’s better not to pay off a larger amount towards your loan. You don’t want to be in a position where you’ve paid off the student loan but need additional financing to fix holes in your business at a later point. (Remember: while you could have claimed interest on your student loans as tax deductions, you can’t claim interest paid towards a credit line or a personal loan).
Another financial component to pay attention to when you have surplus income is to make sure your personal finances are also doing well: look at whether you’re contributing between 10% to 15% of your income towards anRRSP fund, and how much you can direct towards your contingency fund.
Ultimately, student loan debt will become one among your many other financial commitments. How you choose to pay it off will depend on many factors including what kind of business you run and what kind of lifestyle you wish to afford.