Talk to any homeowner and they’ll tell you there are two paths you can take when it comes to low interest rates.
One path is to ratchet up your debt and not put much emphasis on paying it down. The second — and you’ll need some discipline — is to use that lower rate to knock down your principal a lot more quickly.
Manitoba students just got a chance to take that second route, based on a decision by their government to dramatically lower interest rates on the provincial part of their loans.
Students in that province can now borrow at prime, which sits at 3%. Previously it was prime plus 150 basis points, or 4.5%. There’s potential for major savings and an opportunity to get out of debt a lot faster after graduation, six months after which you are forced to start repaying your government loan.
Interest-rate levels differ from province to province and on average the federal government picks up 60% of loans. Ottawa’s rate is a steep 250 basis points above prime, or 5.5% based on today’s rates
There are some parallels between homeowners and students when it comes to their debt. Most student loans are taken on by the government. Banks may be relatively free with their home loans but take away the government backing and there would probably be less interest in high-ratio mortgages with as little as a 5% down payment.
It’s understandable that students are less focused on interest rates than rising tuition costs. Statistics Canada said this week that average tuition rates were up to $5,581 this academic year, a 5% jump from a year earlier. That increase came on top of the 4.3% the year before.
Most people who take on student loans do pay them back, having found out they did end up making more money because they got an education and were therefore able to pay down their debt with higher income.
“If tuition fees skyrocket and get to $7,000 like they are in Ontario, then having interest at prime is still going to be significant,” said Adam Awad, national chairman of the Canadian Federation of Students.
Newfoundland and Labrador is easily the best place to be a student, with the lowest average tuition of any province — $2,649 — which has been frozen since 2003-2004. The province also doesn’t charge interest on student loans.
Prince Edward Island is about to go interest-free too, but Mr. Awad says that will only go so far in helping students.
“It’s good decision,” he says of lowering rates. “But it needs to be paired with lowering [tuition].”
He said there are 500,000 Canadian graduates who are using the repayment assistance program, which allows you to stop making payments or to reduce payments if your income is low enough.
It’s almost impossible to declare bankruptcy on a student loan in Canada. You have to wait seven years after graduation to even try that route.
Saul Schwartz, a professor at Carleton University’s School of Public Policy and Administration, says Canada still has some of the highest interest rates on student loans in the world.
“Canada is a high interest-rate student-loan country and there is no good reason for it,” Prof. Schwartz says.
U.S. subsidized student interest rates remain at 3.4% after Congress agreed to extend the current rate, which had been scheduled to double to 6.8%. The move was made to combat the massive student debt problem in the U.S., which now has US$1-trillion in academic loans outstanding.
In the United Kingdom, you pay the rate of inflation, with the rate rising to 3% as you earn more money. Australia charges the rate of inflation.
Interestingly enough, Prof. Schwartz says students probably are not that sensitive to rates. “If you moved it to prime minus [zero], I don’t think people would care,” he says, in reference to how much debt students would take on.
There is some evidence students are trying not to take on as much debt. A poll commissioned by Bank of Montreal and conducted from July 19 to 26 with a sample size of 1018 post-secondary students found 67% have been working, with paying for school the number one reason for the job.
Mr. Schwartz says most people who take on student loans do pay them back, having found out they did end up making more money because they got an education and were therefore able to pay down their debt with higher income.
With lower rates, they’ll be able to pay down that debt even faster.
“It depends on the situation whether they pay down that faster or cut the payments,” Prof. Schwartz says of the impact of lower rates.
Any lowering of interest rates should be welcomed by students as a way to pare their debt. Ask any conservative homeowner.