Should You Invest in XEQT or Pay Off Student Loans First? A Canadian Guide

I graduated with $28,000 in student debt and exactly zero investing knowledge. Every paycheque felt like a tug-of-war. Part of me wanted to throw everything at the debt and be free of it. Another part had just discovered compound interest calculators and was terrified of “falling behind” by not investing early.

I spent weeks reading Reddit threads, watching YouTube videos, and making spreadsheets at 1 AM. The advice was all over the place. “Pay off all debt first!” “No, invest immediately — time in the market beats everything!” “Split the difference!” It felt like no matter what I chose, I’d regret it.

Sound familiar? If you’re a Canadian grad staring at student loan payments while your TFSA sits empty, this guide is for you. The answer isn’t as simple as the internet makes it sound — but it’s also not as complicated as it feels at 1 AM.

1. The Current State of Student Loans in Canada

Before we compare anything, you need to know the interest rates you’re actually dealing with. This is where Canada is genuinely unusual compared to many countries.

Federal Canada Student Loans: 0% Interest

Since April 1, 2023, federal Canada Student Loans charge zero percent interest. That’s not a typo. The federal government eliminated interest on Canada Student Loans as part of Budget 2023, and this change is permanent — it was enshrined in legislation.

If your entire student debt is federal Canada Student Loans, your debt is not costing you a single cent in interest. This completely changes the math compared to, say, American student loans charging 5-8%.

Provincial Student Loans: It Varies

Provincial loans are a different story. Each province sets its own interest rate:

A few provinces have also eliminated interest on their provincial loans — great news if you’re in Atlantic Canada. But if you’re in Ontario, Alberta, or Saskatchewan, your provincial loan portion is charging real interest that compounds every month.

How to Check Your Split

Most graduates have a combination of federal and provincial loans. Log into your National Student Loans Service Centre (NSLSC) account to see the exact breakdown. The federal portion (0% interest) and provincial portion (variable interest) are tracked separately.

This matters enormously for the invest-vs-repay decision. A dollar of federal loan debt at 0% costs you nothing to carry. A dollar of provincial debt at 6.45% is actively eating into your net worth.

2. The Math: Student Loan Interest vs XEQT Returns

Let’s get concrete. The core question is whether the return you’d earn by investing in XEQT exceeds the interest rate on your student loans.

The Simple Comparison

What the Rates Tell You

If your debt is entirely federal (0% interest): Investing in XEQT is mathematically superior in almost every scenario. You’re comparing a 0% cost against an 8-10% expected return. Every dollar you put toward extra loan payments instead of XEQT is a dollar losing 8-10% in annual opportunity cost.

If you have provincial debt at 5-6%: It’s closer. XEQT’s expected 8-10% return exceeds your loan rate, but the spread is narrower, and XEQT returns aren’t guaranteed. A bad market year could mean your investments drop 20% while your loan balance stays the same.

If you have private student debt or a line of credit at 8%+: Pay it off first. The guaranteed “return” of eliminating 8%+ interest beats the uncertain return of XEQT investing, especially for money you might need in the near term.

3. The Student Loan Interest Tax Credit

Here’s a detail many guides miss. The interest you pay on government student loans (both federal and provincial) qualifies for a non-refundable federal tax credit of 15%. Some provinces offer an additional provincial credit.

What this means in practice:

• If you pay $1,000 in student loan interest, you get a ~$200-$250 tax credit (combined federal + provincial)
• This effectively reduces your provincial loan interest rate by about 20-25%
• A 6.45% provincial loan effectively costs you ~4.8-5.2% after the tax credit

This makes the comparison with XEQT’s 8-10% expected return look even more favorable for investing.

Important: The tax credit only applies to government student loans (Canada Student Loans and provincial student loans). Private lines of credit, bank loans, or credit card debt used for education do NOT qualify.

Also note: if your federal loans charge 0% interest, there’s no interest to claim a credit on for that portion. The credit only matters for your provincial loan interest.

4. The Five Scenarios: What Should YOU Do?

Your situation determines the right answer. Here are the five most common scenarios for Canadian graduates:

Scenario 1: 100% Federal Loans (0% Interest)

Recommendation: Invest in XEQT. Make minimum loan payments only.

This is the clearest case. Your debt costs literally nothing. There is zero mathematical reason to make extra payments. Every dollar above the minimum should go into your TFSA, invested in XEQT.

Even from a psychological standpoint, knowing that your $30,000 loan isn’t costing you interest should help you sleep at night. Let it sit. Pay the minimums. Invest aggressively.

Scenario 2: Mixed Federal (0%) and Provincial (5-6.5%)

Recommendation: Minimum payments on federal. Target the provincial portion with modest extra payments. Invest the rest in XEQT.

Your federal debt is free money. Leave it alone. Your provincial debt is costing you 5-6.5%, but after the tax credit, the effective rate is ~4-5%. XEQT’s expected return of 8-10% comfortably exceeds this, but some extra payments on the provincial portion reduce your risk.

A reasonable split: put 60-70% of your extra cash toward XEQT, 30-40% toward extra provincial loan payments.

Scenario 3: High-Interest Private Loans (8%+)

Recommendation: Pay off the private debt first, then invest in XEQT.

If you consolidated student debt onto a line of credit, credit card, or private loan at 8%+, that debt is an emergency. No investment strategy reliably beats guaranteed 8%+ interest. Throw everything at it, then redirect those payments to XEQT once it’s gone.

Scenario 4: Small Loan Balance ($5,000 or Less)

Recommendation: Just pay it off, then invest everything in XEQT.

When the balance is small, the mathematical difference between paying it off and investing is negligible. But the psychological freedom of being debt-free is real. If clearing $5,000 in debt helps you invest more confidently going forward, the math says it’s fine to prioritize it.

Scenario 5: Large Loan Balance ($40,000+) with Provincial Interest

Recommendation: Hybrid approach — invest in XEQT while making strategic extra payments.

With a large balance, the interest charges add up. But you also can’t afford to miss years of compound growth in XEQT. The hybrid approach (detailed below) is your best bet.

5. The Hybrid Approach: How to Do Both

For most graduates, the answer isn’t “pay off all debt” or “invest everything.” It’s a deliberate split that optimizes for both goals. Here’s how to structure it:

Step 1: Make All Minimum Loan Payments

This is non-negotiable. Missing payments damages your credit and can trigger penalties. Set these up on auto-pay and forget about them.

Step 2: Build a Starter Emergency Fund ($1,000-$2,000)

Before investing or making extra loan payments, have at least $1,000-$2,000 in a high-interest savings account. This prevents you from going into credit card debt when the unexpected happens.

Step 3: Capture Free Money First

If your employer offers RRSP matching, contribute enough to get the full match. That’s an instant 50-100% return. No loan repayment strategy beats free money.

Step 4: Split Your Extra Cash

Here’s the framework:

Step 5: Invest in XEQT Inside Your TFSA First

Your TFSA should be the first account you fund. All growth inside a TFSA is completely tax-free, which maximizes the advantage of investing over loan repayment. XEQT in a TFSA earning 8-10% tax-free easily outperforms paying down a 5% provincial loan.

Step 6: Reassess Annually

As your loans shrink and your XEQT portfolio grows, you can shift more toward investing. The goal is to be 100% invested in XEQT (no extra loan payments) as soon as your high-interest provincial debt is gone.

6. A Worked Example: $30,000 in Student Debt

Let’s run the numbers for a typical scenario. Meet Priya, age 24, who just finished her master’s degree:

• Total student debt: $30,000
  • Federal portion: $18,000 (0% interest)
  • Provincial (Ontario) portion: $12,000 (6.45% interest, ~5% after tax credit)
• Monthly income after tax: $3,800
• Monthly expenses: $2,800
• Extra cash available: $1,000/month
• Minimum loan payments: $350/month (already included in expenses)

Option A: Pay Off All Debt First, Then Invest

• Puts entire $1,000/month toward extra loan payments
• Debt-free in ~2.5 years
• Starts investing $1,000/month in XEQT at age 26.5
• XEQT portfolio at age 35 (8.5 years of investing, 8% return): ~$152,000

Option B: Invest Everything, Minimum Payments Only

• Invests entire $1,000/month in XEQT from day one
• Federal debt: paid off slowly through minimums (free, so who cares)
• Provincial debt: paid off slowly through minimums (paying ~$500-600/year in interest)
• XEQT portfolio at age 35 (11 years of investing, 8% return): ~$206,000
• Total interest paid on provincial loans over that period: ~$3,500

Option C: The Hybrid (Recommended)

• Invests $700/month in XEQT, puts $300/month extra toward provincial loans
• Provincial debt gone in ~3 years (age 27)
• Then shifts to $1,000/month in XEQT
• XEQT portfolio at age 35: ~$190,000
• Total interest paid on provincial loans: ~$1,200

The Comparison

The hybrid approach gives Priya roughly $38,000 more than the “pay off debt first” approach, while keeping her provincial interest costs low. The “invest everything” approach technically wins on pure math, but carries more psychological weight from carrying debt longer.

For most people, the hybrid is the sweet spot — it’s close to mathematically optimal and feels responsible.

7. The Psychological Factor: Don’t Underestimate It

Math is important. But you’re not a spreadsheet. How you feel about debt matters, and ignoring that can backfire.

If carrying student debt keeps you up at night, causes constant stress, or makes you second-guess every financial decision — pay it off faster. The difference between the hybrid approach and the “pay off everything first” approach over a lifetime is meaningful but not enormous. Peace of mind has real value.

On the flip side, if you’re the type who can look at a loan balance, shrug because it’s at 0% interest, and happily watch your XEQT portfolio grow — lean harder into investing. Your temperament should inform your strategy.

Here’s what works for most new graduates:

• Paying off the provincial portion (which actually charges interest) gives you the psychological win of eliminating “real” debt
• Keeping the federal portion (0% interest) and investing instead feels smart and strategic rather than lazy
• Watching your XEQT balance grow creates positive momentum that makes you want to invest more

The worst outcome isn’t choosing the “wrong” strategy. The worst outcome is analysis paralysis — spending months or years deciding what to do while your money sits in a chequing account earning nothing. Pick a strategy and start. You can always adjust later.

8. The Repayment Assistance Plan (RAP): A Safety Net You Should Know About

If your income is low after graduation, the Repayment Assistance Plan (RAP) is a government program that can reduce or eliminate your monthly payments:

• Stage 1 (months 1-60): If your income is below a threshold (varies by family size), your required payment drops — potentially to $0. The government covers the interest during this period.
• Stage 2 (after 60 months on RAP): The government starts paying down your principal too.
• After 15 years on RAP (or 10 if you have a permanent disability): Your remaining loan balance is forgiven entirely.

If you qualify for RAP, there’s even less reason to make extra payments. Let the government cover your interest while you invest in XEQT.

To apply, contact the NSLSC or your provincial student aid office.

9. Your Decision Framework

Here’s the step-by-step process:

1. Log into your NSLSC account and determine the exact split between federal and provincial loans
2. Check your provincial interest rate using the table above
3. Pay off any private/LOC debt above 7% first — no debate here
4. Federal loans at 0%? Make minimums only. Every extra dollar is better off in XEQT
5. Provincial loans at 5-6.5%? Use the hybrid approach — invest most in XEQT, make modest extra payments
6. Open a Wealthsimple TFSA and set up automatic XEQT purchases
7. Reassess every 6-12 months as your income grows and debt shrinks

10. The Verdict

Here’s what I wish someone had told me when I graduated with $28,000 in debt:

Your 0% federal student loans are not an emergency. They’re not even a problem. They’re an interest-free loan from the government that lets you invest at 8-10% returns with their money sitting in your account. Make the minimums and invest the rest.

Your provincial loans deserve attention, not panic. At 5-6.5% (less after the tax credit), they’re worth paying down a bit faster, but not at the expense of missing years of XEQT compound growth in your TFSA.

The biggest mistake isn’t picking the “wrong” strategy. It’s doing nothing while you agonize over the decision. A new graduate who invests $300/month in XEQT while making minimum loan payments will be dramatically better off at age 40 than one who spent three years “figuring out the optimal plan” before starting.

Start now. Adjust later. Your future self will thank you either way.

Frequently Asked Questions

Should I use my RRSP refund to pay off student loans?

It depends on your interest rate. If your loans are 0% federal, invest the RRSP refund back into your TFSA or RRSP. If you have provincial debt at 5-6%, splitting the refund between extra loan payments and investing is reasonable. If you have high-interest private debt, throw the full refund at it.

Can I deduct student loan payments from my taxes?

You can’t deduct the payments themselves, but you can claim a tax credit for the interest paid on government student loans (federal and provincial). This is a non-refundable tax credit at the 15% federal rate, plus your provincial rate. It doesn’t apply to private loans, lines of credit, or credit card debt.

What if the government changes the 0% interest rate on federal loans?

It’s possible but unlikely in the near term — the 0% rate was legislated, not just a temporary measure. If rates do change in the future, reassess using the framework in this guide. The higher the interest rate, the more you should lean toward extra payments.

I have $50,000+ in student debt. Should I still invest?

Yes, with the hybrid approach. Even with large debt, investing something in XEQT each month is better than investing nothing. Start with whatever you can — even $50 or $100/month. The compound growth from starting early is worth far more than the interest savings from slightly faster debt repayment on a 0% federal loan.

Should I consolidate my student loans?

Be careful. Consolidating government student loans into a private line of credit means you lose the 0% federal rate, the interest tax credit, and access to RAP. In most cases, keeping your government loans separate and managing them individually is the better move.

What about saving for a house down payment? Should that come before XEQT?

If homeownership is a near-term goal (3-5 years), the FHSA is your best friend — you get a tax deduction on contributions and tax-free withdrawals for a home purchase. You can hold XEQT inside an FHSA if your timeline is 5+ years, or a HISA/GIC if it’s shorter. This can work alongside both loan payments and TFSA investing.

Keep Reading

• Investing in Your 20s: The Student & Young Canadian’s Guide to Building Wealth
• Emergency Fund vs Investing in Canada: A Simple Ladder
• First Paycheque Investing System in Canada (TFSA + XEQT)
• XEQT vs Paying Off Your Mortgage: The Great Canadian Investing Debate
• Dollar Cost Averaging in Canada: The Simple Strategy to Build Wealth