Canada’s Hidden Tax On Low-Income Students

I like to mix up our blog topics. But we need to return to this student loan interest theme because it’s costing Canadian students billions.
Let’s do the math.
Canadians pay some of the highest government student loan interest charges in the world. It weighs grads down with extra debt when they’re struggling to start their careers.
That’s a hardship. And it’s also a whopping hidden tax.
Here’s how it works:
Governments borrow money more cheaply than businesses.  For several years now, provincial and federal governments have tended to pay 2% or less.
Then they turn around and charge up to 8% (fixed-rate = prime [now 3%] + 5%) on their student loans. 
Okay, their highest floating interest rate is less than that. It’s “only” prime + 2.5%. But rates are even higher than 8% for some students with older loans who locked into a fixed rate. In cases like these, grads can still be stuck paying 10% or more.
Now that’s an interest spread. For example, when a government buys at 2% and sells at 8%, the transfer of wealth from students to government amounts to a 400% gross profit
Even if they buy at 2% and sell at the floating student loan interest rate of prime + 2.5% (now totalling 5.5%), that’s a sweet, sweet deal.
For the government…
This cash grab has largely been overlooked in mainstream media. Maybe that’s because it’s so hard to unearth what’s going on.
But Canada now has roughly $15 billion in outstanding government student loans. So we’re not talking small change here.
And look who’s paying:  

  • Students who couldn’t access post-secondary education without going into debt
  • Grads whose incomes won’t let them escape the hidden tax by rapidly paying off loans 

What is this? A levy on the poor for trying to better themselves???

It may be a revolting policy, but Canadian students and their parents have yet to revolt.
However, they have voiced displeasure, often through long-running student campaigns.
And they are finally being heard – except in Ottawa and a couple of the provinces. Yes, most provinces have been cutting their student loan interest rates.
At writing, only three Canadian governments continue to milk low-income students to the max. They charge the top student loan rates mentioned at the start of this blog: prime + 2.5% (floating-rate, now 5.5%) and prime + 5% (fixed-rate, now 8%).
Let’s award them something. How about mortar board (graduation cap) made of cement? That's kinda what it feels like to graduate with so much debt.
Let’s hear it…
Student Finance 101’s cement mortar board for 2012-2013 goes to:
Canada (the federal government)
British Columbia
New Brunswick
Hey, no hard feelings. We only go by the numbers here...
Next Month:
Student Finance 101 Compares 2013 Student Loan Interest Charges Across Canada

© Jeannine Mitchell 2012–2014