The NDP and the Liberals have both announced promises to set a zero interest rate on student loan debt. The idea is to help former students who are struggling to repay their loans. But this will not help those most in need – borrowers in the Repayment Assistance Program (RAP) who already pay zero interest, as well as borrowers in default who are at risk of financial penalties.
Jagmeet Singh made a splash recently with a tweet saying the Trudeau government was profiting from student loans, and that an NDP government would set the interest rate on federal student loan debt to zero. The controversy over the first assertion has distracted from the proposal itself, which was unfortunate because it was the most substantive proposal on financial aid to post-secondary students in the campaign at that time. The Liberal platform, just released, makes the same commitment.
So, what would the change mean for students? Who would benefit, by how much and is it a good way to improve affordability and access to post-secondary education?
The short answer is that a zero-interest-policy would do little to encourage lower-income students to go to university or college, and would benefit only a relatively small number of people struggling with student debt. There are alternative policies including further expansion of the existing program that helps those on lower incomes, as well as more debt forgiveness more quickly – that would be better-targeted at those most in need.
Figure 2. Student loan debt as a percentage of after-tax income for households with student loan debt, by region and year
Background: how much student loan debt do Canadians have?
Total student loan debt owed by Canadian households stood at around $37 billion in 2016, according to the Survey of Financial Security. Continue reading “There are better ways to help student loan borrowers than zero-interest loans”
