Tax credits for student loan interest payments available at the federal level and in all provinces except Ontario mean that a refund is effectively given for between 15 per cent (Ontario) and 30 per cent (Quebec) of all interest payments made
Let’s consider how much would be saved in total interest payments over the life of a loan under the regular repayment program by cutting interest rates to zero for the average borrower from a BA program, graduating with $16,345 in federal debt (while noting there will be no changes for any provincial debt.)
Assuming the borrower chooses the regular repayment program at the current fixed rate, waits for six months after graduation to begin repayments, and repays over 15 years (the longest standard option), total interest saved would be $5,900, or $393 per year. For the default option of repayment over 10 years, saving would be slightly less than $3,750, or $375 per year. Under the current floating rate, assuming it lasts throughout, saving on a 10-year loan would be $2,000, or $200 per year. (You can run your own scenarios using this calculator).
There’s another wrinkle in estimating how much the affordability of college or university would change if interest rates are cut to zero. Each $1,000 reduction in interest payments, therefore, would actually mean only a net $850 back in the pockets of Ontario graduates, or $700 for Quebec graduates.
Those with more federal borrowing will save more. While that might seem to mean those who need the most help benefit the most, as noted earlier, borrowing is greater for university than college students, and greater for MA and PhD students than undergraduate students. But university graduates also tend to earn more than college graduates, and those with MAs and PhDs earn more than those with BAs. As a result, the types of students who borrow more also tend to have higher incomes after leaving school and are better able to repay the debt. Default rates for these groups tend to be lower than for payday loans Harker Heights groups that tend to borrow less.
A significant proportion of borrowers would not benefit at all, because they already have a zero interest rate specifically, all students in the first six months after leaving studies (between three and five per cent of all borrowers in repayment) and all borrowers in RAP with zero repayments (roughly 20-25 per cent of borrowers in repayment). Further, because of the current moratorium on student loan interest, a permanent zero-interest-rate policy will save borrowers money only after .
Conclusion
If the goal of a zero-interest-policy is to target assistance to those struggling with repayments after leaving school, several other policy changes would be better.
First, RAP could be further improved, building on the changes in the federal budgets of 2019 and 2021. Most ambitiously, RAP could be made the default repayment plan for all borrowers, removing the need for those eligible to reapply every six months, as well as making repayments simpler and more predictable for students.
Second, allowing earlier debt reduction would help many of those struggling the most. The NDP has also said it would consider across-the-board debt reductions, while the Liberal platform mentions debt forgiveness for professionals working in rural areas. A change to RAP that allowed for phased-in debt relief for those with low incomes before they have spent 60 months on RAP or before they have been in repayment for 10 years since leaving school would more effective than such one-off debt forgiveness.
Third, making student loans dischargeable in bankruptcy would help those in the greatest financial trouble, even though it would affect relatively few borrowers.