New graduates with debt will get a discount on their loans thanks to the recent federal budget – but student leaders and financial experts say that’s not enough to allay the financial anxiety many young people face after getting their diploma.
Starting in the next school year, the federal government will reduce the interest rate on its variable rate student loans – chosen by 99% of borrowers – by 2.5 percentage points over the prime rate. Interest on fixed rate loans will decrease by three percentage points to the prime rate plus two. Graduates will also benefit from a break in interest accrual during the six-month grace period that students have right after leaving school before debt payments start, meaning they will finish. by paying less interest in the long run.
These measures, which apply to both Canadian student loans and Canadian apprenticeship loans – will benefit approximately one million borrowers of student loans currently in repayment and 200,000 graduates who leave school each year, according to the 2019 Liberal budget.
For graduates entering the workforce with fewer full-time, well-paying jobs, loan repayments can be crippling. Having to pay back a few hundred dollars a month for a decade delays other steps, such as buying a house or having children.
“From a society’s point of view, it really cripples everyone,” said insolvency trustee Doug Hoyes, who often sees clients overwhelmed by student loans. “You are 35 years old before you can get married, have children or start a business. … If these [budget measures are] enough to cover the rent, that’s great, but… there’s a gushing wound and here’s a little bandage.
According to the Ontario Student Assistance Program, new graduates with loans typically take about nine and a half years to repay. Most government-issued student loans contain a federal and provincial portion: OSAP’s online payment calculator assumes a 70% federal and 30% provincial split. Each portion has its own interest rate and payment terms – the recently announced changes only apply to federal funds.
The government estimates that changes in the recent budget will save the average borrower $ 2,000, based on a $ 13,500 federal portion of the loan. A recent graduate with just under $ 28,000 in debt – of which nearly $ 20,000 in federal loans, or 70% – should save almost $ 3,000. These savings include nearly $ 400 from the six-month interest-free grace period and $ 24 per month due to the lower interest rate, according to calculations by Linda Baca, who holds the Chartered Professional Accountant designation.
In January, the Ontario government unveiled a number of changes to OSAP, including the elimination of the six-month grace period during which students would not earn interest on their provincial loans. Interest in the 2019-2020 school year will start right after graduation.
A 2018 Survey of the Canadian Consortium for Investigating Universities about 15,000 graduate students estimate the average debt – among the 50 percent of students who ended up in debt – at $ 27,929, hence our example of $ 28,000 above. Monthly payments at the new interest rate are approximately $ 335.
Add that to the challenges – and starting salaries – that come with launching a career and it’s hard to imagine a lot of savings left, says Stephanie Bertolo, vice president of education for the McMaster Students Union in Hamilton. . People who didn’t think much about their loans while in school often face a shock from the stickers once they have to start paying them back, she added. “I would say that probably surprises a lot of students.”
With rising tuition fees and recent changes in Ontario that have reduced scholarships and made fewer people eligible for loans, Bertolo believes many of the students she represents will continue to struggle. His organization would like the federal government to increase grants – and provide them up front rather than in the form of tax credits – and remove all interest on the federal portion of the loan.
“With the BC provincial government eliminating interest rates on student loans [in its February budget], we hope that the federal government and the other provinces will see this as a possibility, ”she said.
Ms Bertolo, 22, graduated in the spring of 2018 but has a full one-year grace period on her loan because she works for a registered non-profit, the Student Union. “It’s not always advertised, so people usually don’t know they can do it,” she said.
She got financial help from her family and for the first three years got a 30% scholarship on her tuition, which meant she didn’t need a loan. The changes to OSAP meant she was no longer eligible for the grant, so she borrowed about $ 4,000 for her final year. Her monthly payments starting May 31 will be $ 76.64.
Vanessa Pummer, 21, graduated from the University of Windsor’s business administration program this spring with a $ 39,450 OSAP debt – a figure that represents all of her tuition and some other fees, “mostly from things like groceries and then some everyday things that I needed that I couldn’t cover. She has two part-time jobs in addition to her studies.
OSAP’s online calculator estimates the monthly payments to be around $ 475, but says it was difficult for her to find the exact details on the online portal. “He said come back November 1 and that would help me customize a payment plan,” she said. “That’s good, but I would like to know now how much I have to pay.”
Unlike many of her peers, she has already applied for a position at a recruiting firm in Dallas. His starting salary is approximately $ 42,700 Canadian, plus commissions. After taxes, she will earn at least $ 3,000 Canadian a month – enough to make her payments and still live well enough, she hopes.
Ms. Pummer says that even with the financial literacy that came with her business training, it was difficult to navigate through all of the details of her loans. “It’s an environment where you fend for yourself. Even in high school, there really isn’t any education on what it means when you get OSAP and how the system works.
Mr. Hoyes, the insolvency trustee, estimates that about one in seven insolvencies relate to student loans. Government guaranteed student loan debt is only automatically discharged in bankruptcy if the borrower has not been to school for seven years. So, by the time Mr. Hoyes meets former students, they have been overwhelmed with debt for some time.
Co-founder of Ontario-based Hoyes Michalos & Associates, he says his typical millennial client has about $ 14,000 in unpaid student debt, plus $ 12,000 in credit card debt and $ 5,000 owed to payday lenders. – and only about $ 2,400 per month of income. “They end up resorting to payday loans to make their monthly payments. “
He says the new federal measures are better than nothing, but small enough to tackle the problem caused by rapidly rising tuition fees. “When I went to school in the 1980s, my tuition was $ 1,000 a year. … The tuition for the same program is now $ 7,000, ”he said, noting that according to the Bank of Canada’s calculations, this is $ 5,000 more than the cost of inflation.
“My advice to individuals would be to think long and hard before taking out a large student loan. “