Student Financial Aid | The bad idea of ​​interest-free loans

In its recent budget update, the federal government announced the elimination of interest on federal student loans. He cited the rising cost of living as a justification. It is perhaps useful to remember that this measure will not apply to students in Quebec and that in the other provinces where it applies, its main effect will be to encourage the slowing down of loan repayments.

Posted at 1:00 p.m.

Pier-Andre Bouchard St-Amant

Pier-Andre Bouchard St-Amant
Professor of Public Finance at the National School of Public Administration and Director of the Applied Public Economics Research Group*

In a majority of Canadian provinces, federal student financial assistance programs coexist with one or more similar provincial programs. Quebec is one of the exceptions, where only a provincial program exists. The province has opted out of the federal program and is receiving full compensation.

In doing so, there is no condition that the Quebec government use the funds for an “equivalent measure”, nor even any obligation to improve the federal program in order to receive a transfer. Thus, the announcement has a priori no impact for former Quebec students (unless the Quebec program decides to do the same thing as the federal program).

Following the announcement, it would not be surprising if Quebec student associations asked that the funds transferred to Quebec be used to finance another dimension of the Quebec student financial assistance program. Certainly, the Quebec version related to the use of additional funds will not be decided in Ottawa. A subsequent question is therefore whether Quebec should follow the federal decision.

In terms of effects, removing the interest payable on student loans removes a significant incentive for them to be repaid (not to mention the already existing tax credit that is associated with student loan interest).

In Quebec, this would result in incentives for banks and students to agree to longer loan repayments, thus generating ex-student liabilities that would stretch longer…and more government transfers to banks. Why prioritize student loan repayment if the government is paying?

Negligible impact on registrations

Conversely, the impact of the measure is likely to be negligible on the decision to enroll or not in a higher education program. Student loans alone have a relatively small effect on the decision to study. Their main advantage is to offer liquidity to students while costing little in public funds. Considering that the subsidy is granted after the studies and that it relates only to the interest paid, the effect on participation will be very weak.

If we are in favor of subsidizing former students, it would perhaps be more appropriate to reduce the debts by the amount equivalent to the cost of the measure announced.

The incentive to repay would remain and the debt of ex-students would be lower. If we are thinking of improving access to studies, a measure that is more focused on the enrollment decision period, ie before studies, would be more appropriate. An admission scholarship would be a good example.

If the idea of ​​going through the loans and bursaries program aims to reinforce the objectives of financial accessibility, it would be better to focus the financial incentives at the moment when they have the most impact, i.e. when deciding to make studies. And even if the aim is to alleviate the rising cost of living for these people, it would be better to target the period when they have the least money, that is, during their studies. In short, it is not very difficult to conceive of a better use of the funds than that announced by the federal government.

* The work of Pier-André Bouchard St-Amant deals with taxation or funding policies in higher education.


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