Interest Rates

Why the rest of Canada should follow B.C.’s move to get rid of student loan interest

By: Jessica Mach on February 22, 2019

When the British Columbia government dropped its 2019 budget on Tuesday, there was good news for students: interest on all existing and future student loans would be eliminated, effective immediately.

The announcement comes only a month after Ontario’s Progressive Conservative (PC) party unveiled a completely different approach to student aid on the other side of the country: taking some of it away.

It’s hard not to wonder: why are the two provinces on such different paths when it comes to plotting the financial future of Canada’s youth?

Citing the financial unsustainability of the Ontario Student Assistance Plan (OSAP), the provincial loans program, the PC government presented a series of cost-cutting measures in January that focused on changing the program’s eligibility criteria. Students would now only be eligible for OSAP if their families earn less than $140,000 per year, down from the previous threshold of $175,000. Previously, many students were able to receive grants up to the full cost of their tuition; under the new rules, the majority of grants will go to students whose families earn less than $50,000, while all other students will only be eligible for loans.

The government also cut the six-month grace period after graduation, which means that interest will immediately start accruing on loans once students are no longer in school.

The new policies were introduced along with a 10% tuition cut, but many students are convinced that it wouldn’t be enough to make up for the rest of the provincial cuts.

“The government’s decision to cut grants means I will have to work more, which will take time away from my studies,” a student at York University told Maclean’s in January. “I actually might have to get a second job. It may also prolong the amount of time it will take me to get my degree.”

B.C. is the fourth province to scrap interest for provincial student loans, after Manitoba, Nova Scotia and Prince Edward Island. Newfoundland and Labrador provides students with non-repayable grants.

The B.C. government’s move came with the announcement that the province was without debt for the first time in 40 years. The government was also projecting a surplus of $274 million for 2019 and 2020.

In comparison, Ontario’s debt stands at over $300 billion as of 2018 — making it the most indebted sub-national jurisdiction in the world.

The difference might account for why the two provinces are taking opposite approaches to student loans, but if the economy is what’s at stake, are cuts to student aid really the answer?

According to a report released by Statistics Canada in 2015, Canadian students graduate with an average of about $26,000 in debt for a bachelor’s degree. Depending on the size of a student’s loan, interest could add hundreds and even thousands of extra dollars to their debt — in addition to putting pressure on their monthly expenses. Vancouver and Toronto, the most populous cities in B.C. and Ontario, are the most expensive cities to live in in the country — especially for young people.

The federal government has been forced to write off millions of dollars in outstanding student loan payments four times over the past five years, as graduates continue to struggle with paying off their loans.

Scott Hannah, president and CEO of the Credit and Counseling Society of B.C., told the CBC on Thursday that about 25% of B.C. students go into default at some point while trying to repay their debt.

In Ontario, students don’t even have that option: even if you declare bankruptcy, you still have to continue making regular payments to OSAP.

And bankruptcy is not, by any measure, a good option. Contrary to popular belief, declaring bankruptcy does not give you a “clean slate” to work with once the bankruptcy period is over. A 2006 study by Cornell University found that a quarter of debtors struggled to pay routine bills only one year after their bankruptcy period had ended. One-third of debtors also reported finding themselves in a financial situation either similar to, or worse than, their circumstances when they had filed for bankruptcy.

As both interest rates and consumer debt levels continue to rise across Canada, and the cost of living continues to trend upwards, it’s clear that many Canadians are already feeling financially pressured.

Eliminating interest could help make monthly payments more affordable, which, in turn, would make paying off loans in full more feasible. In this scenario, everyone wins: the government will be more likely to get back the money they issued in loans, and students can graduate with manageable levels of debt — allowing them to enter the workforce, and participate in the economy, on a stronger footing.