Ottawa plans to make permanent a pandemic freeze on student loan interest in a bid to ease some of the current financial pressures on young Canadians as the cost of living rises.
As part of its autumn budget update tabled on Thursday, the federal government outlined plans to permanently eliminate interest on all federal student and apprenticeship loans, including loans currently being repaid.
Interest rates will still apply to the provincial portion of the student loan.
While the move is helpful for graduating students, said Rebekah Young, director of finance and provincial finance at Scotiabank, it’s ultimately relief for interest payments on debt, not money for tuition or other post-secondary expenses.
“In the bigger picture, they’re still facing increased spending across the board,” he 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 being about $13,367 at the time of leaving school .
Average undergraduate tuition is $6,482 for an academic year as of 2022, according to Statistics Canada, while average graduate tuition is $7,053 as of 2022.
The Liberal government suspended the accrual of interest on student loans in 2021 due to the impact of the pandemic on graduating students as they entered a unique job market. The measure was set to expire in March.
Interest elimination will begin on April 1, 2023, the fiscal briefing said.
An average student loan borrower will save $410 a year as a result of their interest-free loan, the government said in the budget update. (Student loan interest is calculated at either a fixed rate of 2 percent plus the prime rate or a variable rate equal to the prime rate.)
Eliminating the interest on those loans is estimated to cost $2.7 billion over five years and $556.3 million ongoing, the federal government said.
Eliminating interest on federal student loans for good was a Liberal campaign promise during the last federal election.
Young said some may fear the decision could fuel inflation, but that it’s not a particularly strong argument since the measure is relatively small, limited.
Ottawa said graduate students will still be able to use the repayment assistance program, allowing them to pause student loan repayments until they pay at least $40,000 a year and reducing payments for those earning slightly above that amount.
Earlier this week, the zero-payment income limit for student loans was raised from $25,000 to $40,000 for a household of one. The limit increases according to the size of the household.
This move to address student loans comes just months after US President Joe Biden announced a decision to cancel $10,000 for most student loan borrowers and up to $20,000 for 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. Nearly 26 million Americans have applied for student loan forgiveness.
This report by The Canadian Press was first published on November 3, 2022.
