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Student support | The bad idea of ​​interest-free loans

In its latest budget update, the federal government announced the elimination of interest on federal student loans. He cited the rising cost of living as a reason. It may be helpful to keep in mind that this measure will not apply to students in Quebec, and that its main effect in the other provinces where it applies will be to encourage slower loan repayment.

Written at 1 p.m.

Pier-Andre Bouchard St-Amant

Pier-Andre Bouchard St-Amant
Professor of public finance at the Norwegian School of Administration and director of the Applied Public Economic Research Group*

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

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

Following the announcement, it would not be surprising if Quebec student unions 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 student loan interest removes a significant incentive to be repaid (not to mention the already existing tax credit associated with student loan interest).

In Quebec, this would result in incentives for banks and students to agree to longer loan repayments, thus generating commitments from former students that would stretch further … and more public transfers to banks. Why prioritize repayment of student loans if the public pays?

Negligible impact on registrations

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

If we are in favor of supporting former students, perhaps it would be more appropriate to reduce the debt by an amount equal to the cost of the announced measure.

The incentive to repay would remain and former student debt would be lower. If we think about improving access to studies, a measure that is more focused on the admission decision period, i.e. before studies, be more appropriate. An entrance scholarship would be a good example.

If the idea of ​​reviewing the loan and scholarship program is to strengthen the goals of financial accessibility, it would be better to focus the financial incentives at the time when they have the greatest effect, ie. when deciding to carry out investigations. And although the goal 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, i.e. during their studies. In short, it is not very difficult to imagine a better use of the funds than the one announced by the federal government.

* Pier-André Bouchard St-Amant’s work deals with fiscal or financing policies in higher education.

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