Feds to permanently end interest on student loans

Ottawa plans to make permanent its pandemic-era pause on student loan interest in an effort to reduce some of the current financial pressures on young Canadians as the cost of living rises.

As part of its fall fiscal update tabled Thursday, the federal government outlined plans to permanently eliminate interest on all federal student loans and apprentice loans including loans currently being repaid.

Interest rates will still apply on the provincial portion of a student’s loan.

While this move is helpful for students graduating, said Rebekah Young, director of fiscal and provincial economics at Scotiabank, it is ultimately relief for interest payments on debt rather than money toward tuition or other post-secondary school expenses.

“In the bigger picture, they're still confronting elevated expenditures across the board,” she said.

More than 1.8 million Canadian students owe the federal government a total of $20.5 billion, based on 2019 data from the Government of Canada website, with the average loan balance at about $13,367 at the time of leaving school.

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The average undergraduate tuition fee is $6,482 for an academic year as of 2022, according to Statistics Canada, while the average graduate tuition fee is $7,053 as of 2022.

The Liberal government suspended the accumulation of interest on student loans in 2021 due to the effects of the pandemic on graduating students as they entered a unique job market. The measure was set to expire in March.

The elimination of interest will begin April 1, 2023, the fiscal update said.

An average student loan borrower will save $410 per year as a result of their loan being interest-free, the government said in the fiscal update. (Student loan interest is calculated either at a fixed rate of 2 per cent plus prime, or a variable rate equal to the prime rate.)

The elimination of interest on these loans is estimated to cost of $2.7 billion over five years and $556.3 million ongoing, the federal government said.

The permanent elimination of interest on federal student loans was a Liberal campaign promise during the last federal election.

Young said some may fear the decision could stoke inflation, but that it isn’t be a particularly strong argument as the measure is a relatively small, contained one.

Ottawa said graduating students will still be able to use its repayment assistance plan, allowing them to pause student loan repayment until they are making at least $40,000 per year, and reducing payments for those earning slightly above that amount.

Earlier this week, the zero-payment income threshold for student loans increased from $25,000 to $40,000 for a household of one. The threshold increases based on the size of the household.

This move to tackle student loans comes just a few months after U.S. President Joe Biden announced a decision to cancel $10,000 for most student loan borrowers, and up to $20,000 for those borrowers who received a federal Pell Grant. It has received significant pushback.

The White House said Thursday that it has already approved 16 million requests. Close to 26 million Americans have applied for student loan forgiveness.