Can this millennial’s move finally get her out from under her school debt?

Millennial Money is a weekly presentation-based series that provides financial advice to millennials. Read the full series here.

Three months ago, 28-year-old Rebecca moved back into her parents’ house.

With an annual rent increase keeping her from leaving her downtown Toronto apartment, the PR agent pulled the plug on city life.

“My salary is good, so until recently I felt secure paying for a $2,000 apartment downtown,” says Rebecca.

But with the cost of inflation and a rise in your rent, you feel it’s time to try to get ahead of the $15,000 in student loan debt you’ve carried since you graduated in 2017. You also have $6,000 saved in a TFSA.

“This debt has been weighing me down and I want to get rid of it. I also want to save up so I can move back to Toronto soon,” says Rebecca, adding that the costs of living alone were skyrocketing quickly and left her little wiggle room to deal with her debt.

“I don’t want to be home for a long time, but I feel like I don’t have a choice with the current cost of living.”

During the week, Rebecca usually works from home, but commutes twice a week to her office in the city. “I usually cook lunch and dinner for myself and my mom when I’m there.”

On her way to the office, Rebecca says that her commute means she has to leave pretty early in the morning. In that case, she chooses to buy lunch and coffee somewhere near her office. “Unless I’m staying in town to meet friends for dinner, I cook at home.”

He stays in town every other week on the weekends to catch up with friends, go out for dinner and drinks.

We asked Rebecca to share two weeks of expenses to see if she can pay off her debt quickly.

The expert: Jason Heath, CEO of Objective Financial Partners, on Rebecca’s situation:

Rebecca is back living at home with her parents while trying to pay off her student debt so she can move on her own again. She has $6,000 saved in a TFSA account. She has $15,000 on her line of credit from her post-secondary education. If the line of credit is a student line of credit, it may have a favorable interest rate. A bank’s student lines of credit may be at the prime level plus one percent, for example, or 5.7 percent today. Prime is expected to increase in September, so the interest rate could soon exceed six percent. If it’s a regular unsecured line of credit, or if her rate increased after she graduated, Rebecca could be paying 10 percent interest.

If you have $100 of debt at a 10 percent interest rate, it will grow to $110 after one year. If you pay the interest, you will pay $10 in interest. Rebecca’s TFSA would need to earn a higher yield than the interest rate she is paying on her debt to get by. In other words, if she has $100 in her TFSA and doesn’t earn at least $10 or 10 percent in this example, she’s better off using it to pay off her line of credit.

Young people, let alone all investors, can overestimate the potential returns on their investments. Natixis found in a 2022 global survey that investors tend to expect higher returns than financial professionals say are realistic. Canadian financial professionals in the survey expected a long-term return of 6.5 percent (above inflation), while individual investors expected 11.2 percent. For perspective, the Canada Pension Plan (CPP) had only a 4.3 percent above-inflation real rate of return expectation for stocks through 2045 in its latest actuarial report. So even professionals can be overly optimistic.

In Rebecca’s case, even if she invests 100 percent in stocks (most investors don’t), her investment fees can further reduce her earnings. Point? It’s better for her to pay down the debt on her line of credit rather than invest.

Beyond that, he says his debt has been fairly stable since he graduated. His estimated monthly expense is more than $3,000 per month less than his take-home pay. That means there’s about $3,000 a month that she doesn’t know she spends. She could try digging into her spending by reviewing her bank and credit card statements or downloading a budgeting app to track her spending. If she establishes a regular monthly payment to her line of credit beyond the interest payment, that may force her to simply spend what’s left. If she instead uses what’s left to pay down debt and there’s nothing left at the end of the month, she may continue to pay interest and never pay principal.

The sooner you can pay off your debt, the better so you can take advantage of not paying rent while you’re home. Before long, your costs will increase when you move, and it will be much harder to pay off debt and save.

Results: She spent less. Expense in week one: $373.59. Spending in the second week: $242.93.

How do you think you did it: “I’ve been trying to be more conscious in general about where my money is going,” says Rebecca. Having to leave town, she adds, was a wake-up call about better money management.

“It was good to see that I reduced my spending a bit from the previous week,” she says.

Rebecca plans to implement Heath’s advice immediately to rely on a budgeting app to track spending. And she, she adds, she will set up larger automatic payments on her debt so that a higher amount goes toward principal.

Takeaway: Rebecca says that she plans to get aggressive about paying off her debt.

“I think I need to use this time as best I can to get my debt under control and grow my savings,” he says. “My plan is to use half of the extra money I’ve freed up by moving house to get rid of my debt as quickly as possible.”

Jenna Moon is a Toronto-based business reporter focused on personal finance and affordability. Follow her on Twitter: @_jennamoon

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