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. Continue reading “How much would a zero interest rate save borrowers?”