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Stephanie Bertolo, 22 poses on campus at McMaster University in Hamilton on April 10, 2019.The Globe and Mail

New graduates with student debt will get a discount on their loans thanks to the recent federal budget – but student leaders and financial experts say it’s not enough to soothe the financial anxiety many young people face upon graduation.

Starting in the coming school year, the federal government will reduce the interest rate on its floating-rate student loans – chosen by 99 per cent of borrowers – by 2.5 percentage points to prime. Interest on fixed-rate loans will go down three percentage points to prime plus two. Graduates will also get a break from accruing interest during the six-month grace period students have right after leaving school before debt payments kick in, which means they will end up paying less interest in the long run.

These measures – which apply to both Canada Student Loans and Canada Apprentice Loans – will benefit about one million student loan borrowers currently in repayment and 200,000 graduates who leave school each year, according to the 2019 Liberal budget.

For graduates entering a job market with fewer well-paid, full-time jobs, loan payments can be crippling. Having to repay a few hundred dollars a month for a decade is delaying other milestones, such as buying a home or having children.

“From a society-level view, this really crimps everyone,” said insolvency trustee Doug Hoyes, who often sees clients overwhelmed by student loans. “You’re 35 years old before you can get married, have kids, or start a business. … If these [budget measures are] enough to cover the rent it’s great, but … there’s a gushing wound and here’s a tiny Band-Aid.”

New graduates with loans typically take about nine-and-a-half years to repay, according to the Ontario Student Assistance Program. Most government-issued student loans contain a federal and provincial portion: OSAP’s online payment calculator assumes a 70-per-cent federal, 30-per-cent provincial split. Each portion has its own interest rate and payment terms – the recently announced changes apply only to the federal funds.

The government estimates the 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 – including nearly $20,000 in federal loans, or 70 per cent – stands to save closer to $3,000. Those savings include almost $400 from the interest-free six-month grace period and $24 monthly because of 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 eliminating the six-month grace period where students would not accrue interest on their provincial loans. Interest for the 2019-20 school year will begin right after graduation.

A 2018 Canadian University Survey Consortium survey of about 15,000 graduating students put the average debt – among the 50 per cent of students who finished with debt – at $27,929, hence our $28,000 example above. Monthly payments at the new interest rate work out to about $335.

Add that to the challenges – and starter salaries – that come with launching a career and it’s hard to imagine much left for savings, says Stephanie Bertolo, vice-president of education for the McMaster Students Union in Hamilton. People who haven’t thought much about their loans while in school often face sticker-shock once they have to start repaying them, she added. “I would say it probably catches a lot of students by surprise.”

With tuition increasingly expensive, and recent changes in Ontario that reduced grants and made fewer people eligible for loans, Ms. Bertolo believes many of the students she represents will continue to struggle. Her organization would like to see the federal government increase grants – and provide them upfront instead of as tax credits – and remove all interest on the federal portion of the loan.

“With the provincial government in British Columbia eliminating interest rates on student loans [in its February budget], we hope that the federal government and other provinces will consider this as a possibility,” she said.

Ms. Bertolo, 22, graduated in spring 2018, but has a full one-year grace period on her loan because she works for a registered non-profit, the student union. “That’s not always advertised, so people don’t usually know they can do that,” she said.

She got financial help from her family, and for the first three years, got a grant for 30-per-cent off her tuition, which meant she didn’t need a loan. 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, graduates from University of Windsor’s business administration program this spring with $39,450 in OSAP debt – a figure that accounts for all of her tuition and some other costs, "mostly things like groceries and then some day-to-day things I needed that I couldn’t cover.” She has two part-time jobs in addition to her studies.

OSAP’s online calculator estimates monthly payments of about $475, but she says it has been hard for her to find exact details through the online portal. “It said to go back Nov. 1 and it would help me customize a payment plan,” she said. “That’s good, but I’d like to know now how much I have to pay.”

Unlike many of her peers, she has already lined up a job, with a recruiting firm in Dallas. Her starting salary is about $42,700 Canadian, plus commission. After taxes, she’ll take home at least $3,000 Canadian a month –enough to make her payments and still live fairly well, she hopes.

Ms. Pummer says that even with the financial literacy that has come with her business education, it’s been a challenge to navigate all the details of her loans. “It’s a fend-for-yourself environment. Even in high school there’s really no 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 involve student loans. Government-guaranteed student-loan debt is only automatically discharged in a bankruptcy if the borrower has been out of school for seven years – so by the time Mr. Hoyes meets with former students, they’ve been overwhelmed by debt for some time.

Co-founder of Ontario-wide firm Hoyes Michalos & Associates, he says his typical millennial client has about $14,000 in outstanding student debt, plus $12,000 in credit card debt and $5,000 owed to payday lenders – and only about $2,400 a month in income. “They end up resorting to payday loans to make their monthly payments.”

He says the new federal measures are better than nothing, but fairly insignificant in tackling the problem caused by rapidly rising tuition. “When I went to school in the 1980s, my tuition was $1,000 a year. … The same program’s tuition is $7,000 now,” he said, noting that according to Bank of Canada calculations, that’s $5,000 more than the cost of inflation.

“My advice to individuals would be to think long and hard before you sign up for a big student loan.”

Estimated Student Loan Savings

Average loan amount for a 2018 graduate:$27,929
Federal amount (70%)$19,550
Provincial amount (30%)$8,379
Interest rates:
Provincial - prime (currently 3.95%) + 1%4.95%
Federal - prime (currently 3.95%*)3.95%
Monthly payment:$335
Savings during new federal government six-month interest free grace period**$386.26
Monthly savings from reduced interest rate***$23.86
Approximate savings****$3,106.30

Source: Canadian University Survey Consortium’s 2018 graduating student survey; OSAP loan calculator; Federal budget 2019; Linda Baca, CPA

Footnotes: *Reduced from prime plus 2.5%; **6 months interest, at a rate of 3.95% compounded monthly, assuming no payments made; ***based on a term of 9.5 years amortization period, interest compounded monthly; **** Assuming no change in interest rates over the 9.5 years ($23.86 x 114 months, plus $386.26)

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