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Pay down debt or start investing: What should a new grad do?

Study confirms a third of millennials would sell an organ to pay off student loan debt.

Youre done school. You've got a job. And youre starting your grown-up life $25,000 in the red.

Do you put every extra nickel toward paying off your student loan as quickly as you can? Or should you start socking money away for the future?

Going by the numbers alone, it often makes sense to pay off a student loan as quickly as you can as long as you have money put aside for emergencies, experts say.

When you have debt and you have an option to pay it down or invest, you need to try to determine if youre going to earn a higher rate of return paying down the debt or investing the money,says Jason Heath, a financial planner at Objective Financial Partners in Toronto. It doesnt matter who you are, Id say the more you can do to pay down your debt, the better off you are.

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With prime at 2.7 percent right now, a new grad would be facing a 5.2 percent floating rate or a 7.7% fixed rate on their government student loans.

But, unlike most other consumer debt, the interest you pay on a student loan as long as its a federal or provincial student loan and not a student line of credit from a bank is tax-deductible. Youll get a percentage of it back at tax time.

Most uninformed consumers with just $1,000 or $5,000 to invest wont have access to good investment advice... so Id say, pay off debt and after that you can start building up other savings

—Jason Heath, Objective Financial Partners

The average graduate isnt earning that much money and is in a low tax bracket, and that low tax bracket wont get them much of a deduction, maybe 20-30 percent of the interest you paid,says Jason Pereira, a  financial planner at Bennett March/IPC in Toronto. Maybe on a 5.2 percent interest rate it works out to 4.2 percent after those deductions so you want to ask yourself, On a guaranteed basis, can I do better than 4.2 percent on an investment?And right now, the answer is no.

To get any higher return on an investment than youre paying in student loan interest, youd probably have to invest in stocks and wait for the long haul, says Heath.

Most uninformed consumers with just $1,000 or $5,000 to invest wont have access to good investment advice, so youll have a hard time earning more,Heath says. So Id say, pay off debt and after that you can start building up other savings.

Paying any debt off sooner will mean paying less total interest over time paying off that student loan five years early could save you thousands. And, you should generally be paying off the debt with the highest interest rate first so if you have credit card debt with 20 percent interest, pay that off first, Heath says.

Theres no hard and fast rule, it all depends on how much money you have left over for discretionary spending after you paid all your fixed expenses

—Annie Kvick, Money Coaches Canada

But with student loans, If you reduce the balance, youre still making the same monthly payment,says Pereira. So if you get a windfall and decide to pay off 75 percent of your loan and then next month your car breaks down, you cant take a holiday from paying your student loan and you cant get that money back.

Its a good idea to put aside some money generally for an emergency fund so youre not forced to borrow money from a credit card or line of credit, where the interest rate could be higher and isnt tax-deductible.

Theres no hard and fast rule, it all depends on how much money you have left over for discretionary spending after you paid all your fixed expenses,says Annie Kvick, a certified financial planner and associate with Money Coaches Canada in North Vancouver. The goal is to have 3-6 months worth of living expenses in a rainy day fund.

But, many recent graduates will be facing major life events over the next decade getting married, buying a home and car, and having kids. It might not always make sense to postpone those until after your loan is entirely paid off

It depends on your other goals if the student loan is your one and only debt and youre living in your mom and dads basement and not paying any rent, then Id definitely pay it down,says Ngoc Day, a financial advisor with Macdonald, Shymko & Company in Vancouver. But if you have enough for a down payment on a condo and wonder whether you should pay off your student loan instead, Id say put it toward the down payment theres not such a huge rush to pay off the student loan because the interest is tax deductible.