Does the Federal Government Profit from Interest on Federal Student Loans?
New Democratic Party Leader Jagmeet Singh says so. During a campaign stop in Sudbury, Ont. On Aug. 28, Singh proposed a number of measures he said will make post-secondary education more affordable, including eliminating interest payments on all loans. federal students.
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In a tweet posted later today, Singh hinted that the federal government made money from such interest.
“Since coming to power, Trudeau has taken advantage of student debt, to the tune of nearly $ 4 billion in interest payments,” the tweet read, referring to Liberal Leader Justin Trudeau. “I would immediately waive the interest on federal student loans.”
Since coming to power, Trudeau has profited from student debt, to the tune of nearly $ 4 billion in interest payments.
I would immediately remove the interest on federal student loans.
What would that do. mean to you if the interest has been removed?
Text and let me know 👉🏽 613-801-8210
Neither Employment and Social Development Canada nor the National Student Loans Service Center (NSLSC) responded to a request for comment in time for the post.
According to the NSLSC website, a federal student loan can have a fixed or variable interest rate. In the case of a variable interest rate, accounts receivable will be billed at the prime rate, which is currently 2.45 percent. In the case of a fixed rate, the interest is the prime rate plus two percent.
The federal government has suspended the accumulation of interest on Canada student loans until March 31, 2023.
But is Singh’s claim true, false, or somewhere in between? CBC News has asked an expert to verify the facts.
Income different from profit
Christine Neill, associate professor of economics at Wilfrid Laurier University in Waterloo, Ont., Says that claim is false – although student loan financing, a topic she has researched extensively, can get quite complicated. .
“No, I think that’s not really correct as worded,” she said of Singh’s tweet.
The government obviously generates income from interest on student loans, she says, but income is not the same as profits.
“Profit tends to imply that the income you generate is greater than the cost,” she said.
The problem with Singh’s claim is that Ottawa is actually losing money on federal loans and scholarships, even though the interest on the loans does generate income, Neill said.
The government has generated billions of dollars in federal student loan interest revenue since 2015, says Neill, but Singh may be slightly overstating the amount – it’s probably about $ 3.7 billion.
While that might sound like a big number, the federal government is still not making any “profit”. Why? Because the student loan program also comes at a cost to the government.
Break down costs
First, federal student loans don’t earn interest while a student is in school and for the first six months after graduation. The result is that the government is actually subsidizing student education during this time – and certainly not making any money.
“So the government borrows the money and actually has to pay interest on it, and the students will never have to pay back that part. So it’s a grant for the students there,” Neill said.
There are also student reimbursement programs that help students struggling with low incomes after leaving school, which is another blow to government coffers. The income threshold and eligibility for this assistance depend on a number of factors.
And, says Neill, there are interest and debt relief programs for specific professions, such as doctors and nurses.
According to Neill’s analysis, in 2018-19, all of these programs offering debt relief and interest payments cost the government $ 686 million, compared to interest income of $ 852 million.
Neill calls this the “interest subsidy costs”.
“So only there, with these interest subsidy cost programs, the expenses almost exceed the income generated,” she said.
But that’s not all. There is also the cost of bad debts, which are loans that debtors cannot or do not want to pay. These cost the government around $ 300 million in 2018-19.
On top of that, there is the basic cost of running the program, which includes the remuneration of the staff to administer it. This came with a prize of $ 137 million in 2018-19.
The government is losing money on the program
Neill says that when you put it all together, the government not only fails to make a profit, it fails to break even. In other words, it’s losing money.
If you measure income and expenditure with that benchmark from 2015 to 2021 – with the caveat that fully verified numbers are not yet available for the last two fiscal years – she estimates the government has lost around $ 1.8 billion. dollars.
That’s a far cry from $ 4 billion in profits.
“That doesn’t count the cost of the Canada Student Grants Program, which is currently an additional $ 1.5 billion per year,” said Neill.
The NSLSC always recommends that students make lump sum payments on their loans even if interest is not charged while in school or within six months of graduation.
“Make payments while you are in school or in the non-repayment period [six months after you graduate] is a great way to save on long term interest, ”its website says. “This will reduce the principal of your student loan, which will also reduce the total interest you will have to pay later. “
Fact check: False.