Monday, November 12, 2007

How much is it worth to keep giving money to a bank you hate?

My husband’s student loan consolidation forms came in the mail on Friday. He has two loans. A Canada Student Loan (CSL) of $17,800 which is at Prime + 2.5% (currently 8.75%), and a Provincial Student Loan (PSL) of $4,200 at Prime + 1% (currently 7.25%). To add to the confusion, the interest on the student loans is tax deductible, which at my husband’s tax rate would make the true interest rate approximately 6.02% and 4.99% respectively.

This doesn’t look too confusing yet. We could either take Dave Ramsey’s advice and pay down the smaller PSL first to get rid of it as part of a debt snowball, or we could pay down the CSL first, since it has the largest interest rate.

The true issue is annoyance factor. My husband first took out these loans before the government set up the National Student Loan Service Centre (NSLSC) to administer them. Unlike more recent student loans (like mine) which are held through a subsidiary run by the government, my husband’s are held by the one Private Bank that was allowed to administer student loans before the de-privatization. The two loans were mandated at two different levels of government, and thus have different rules. The Private Bank will only follow these rules to the lowest effort legally required.

The CSL is legally required to have statements mailed monthly. This allows us to easily see how much we owe, and what we’re paying in interest each month. The PSL does not have this requirement, and thus the Private Bank refuses to send statements. Nor has the Private Bank enabled any way for the PSL balance to be seen online. The only way to know how much the loan is currently worth is to call their 800 number, or to go into a branch. Since the even the most convenient branches are only open until 5, realistically it means my husband would have to call them and wait up to an hour on hold each time, unless he wants to take time off work.

Because they are no longer in charge of any new student loans, the Private Bank has no reason to switch their policies. The customers affected dwindle each year and are not replaced by new ones. There’s no payback for them to switch over to a less draconian policy.

Nor can my husband switch the loan to another bank without penalty. They are the only Private Bank able to cover student loans. The moment he switches, the loan loses student loan status and thus loses tax deductibility on the interest.

This is the point in time where I thank my lucky stars that I took out my loan after the government had taken over. My loan is accessible online. I can send them electronic payments and know exactly how much I owe any time of the day or night. I see a daily tally of how much interest I’m paying and what part of my payments went to the principal.

Now comes the decision. My original plan was to finish paying my loan (on track to be done by the end of the month), then to start on my husband’s PSL and finally to tackle his CSL. This would follow the ‘debt snowball’ plan and get rid of the lowest balance loans first.

My husband would rather get rid of the higher interest rate loans first, and I’m willing to do that since it is more financially optimal. I think the psychological aspect will still work for me as long as the total number in the NetWorthIQ student loan section is going down significantly each month.

But how do we measure the annoyance factor? By paying the CSL off first, we would be minimizing the interest we pay, but we’d also be maximizing the profit the Private Bank is making off its poorest service account. Every time I want to calculate our net worth, my husband will have to spend an hour of his time on the phone waiting to speak to a Private Bank “customer service representative” (insert eye-roll here). That’ll be once a month.

Personally, I’m leaning towards using our $5,500 emergency fund to pay off the $4,200 loan in one shot to save ourselves the headache of dealing with it, and then spending the next couple of months pouring our money back into the fund. The emergency fund will never drop below $1000, and the interest rate its earning is 4.25%, lower than either of the loans.

Since they are my husband’s student loans, ultimately it’ll be his decision on exactly how we want to repay them. I just want to present the options and my viewpoint.

Does anybody out there have any other solutions or thoughts on the issue? Anything I’m not taking into account? I’d be very interested in another perspective.


FourPillars said...

I think you should pay down the higher interest rate (after the tax deduction) loans first.

I would suggest just setting up a spreadsheet to keep track of how much you owe on the PSL loans - it might not be exact to the penny but who cares?


fecundity said...

Thanks for the comment, Mike. You're probably right about the paying the higher rate loan, and I would likely do so if I wasn't also trying to minimize payments due later next year. I didn't cover that in this post, however.

As for being off a penny or two, you're right. I shouldn't care. I track my mortgage in Excel, and it doesn't bother me that it's probably off by a few bucks at any given time.

I think it might come down to trust. I have my mortgage through a financial institution I that hasn't (yet) screwed me over. I'm confident in their ability to give me the information I want when I want it. However, every dealing I've ever had with the Private Bank holding of Hubby's student loans has been unpleasant and arduous.

I think every Canadian has at least one of the Big Five Banks that they loathe, and another that they love or at least tolerate.