You might notice something special when paying this month’s Canadian student loan bill:
The variable and fixed interest rates on Canada Student Loans and Canada Apprentice Loans have been reduced. The variable rate will be reduced to prime (from prime + 2.5%) and the fixed rate will be reduced to prime + 2% (from prime + 5%).
As of November 1, you’re paying less interest on the money you borrowed from the Government of Canada to get a post-secondary education.
How much has the interest on my student loans been lowered?
The Bank of Canada Prime Rate is currently 3.95%. This means your Federal Student Loan interest is now only 3.95% if you have a variable rate loan. It’s only 5.95% if you have a fixed-rate loan.
This will reduce the interest accruing monthly on your federal student loans by about 30% to 40%. Depending on the amount you owe, this can be huge!
What does this mean for my student debt?
No matter how small or large your student loan debt is, a lower interest rate is always a good thing. Now more of your payment goes towards your principal student loan balance. This will reduce the overall carrying costs of your debt, and get you out of debt faster!
- How to Get Help Repaying Your Student Loans
- Exactly How Much You Have to Earn to Pay Off Your Debt
- 3 Things You Need to Know About Student Debt Before Your Graduate
PS: your 6-month payment-free grace period is now also interest-free
After you graduate from your post-secondary program, you do not have to make any payments on your student loans for 6 months. This was designed so new graduates had time to find gainful employment with their new degrees before being slapped with a student loan bill.
This grace period may have always been payment-free, but it was never interest-free. Your loans continued to accumulate interest, even though you were not required to make any payments. Many graduates were shocked that the first student loan bill they receive demanding payment boasts a much bigger balance than they thought they borrowed. Those days are gone!
Now you don’t need to make student loan payments for the first six months after you graduate AND your loans will not accrue interest during that time!
Should I still be in a hurry to pay off my student loans?
You should always be in a hurry to get to debt-free, but if you’ve been breaking the bank to pay off your student loans, now is a good time to give yourself some breathing room. If you have any other kind of high-interest debt, like credit cards or a line of credit, now is a good time to tackle those first.
Your student loan interest is tax-deductible
Not only is your student loan interest now more affordable than ever, but it’s also tax-deductible. This makes the effective interest rate on your student loans even lower. Your student loans are effectively costing you 3% to 5% in interest, depending on your tax bracket.
This is another reason your student loan debt doesn’t necessarily have to be at the forefront of your debt repayment journey. Feel free to tackle other loans first, build an emergency fund, and get started saving for retirement.
The Government of Canada just gave you a break with a lower interest on your federal student loan. Take advantage!
“… but it’s also tax-deductible. This makes the effective interest rate on your student loans even lower. Your student loans are effectively costing you 3% to 5% in interest, depending on your tax bracket.”
Because student loan interest qualifies for a non refundable tax credit, not a tax deduction, the marginal tax bracket of the tax payer is irrelevant. Taken together the federal and provincial non refundable tax credits effectively reduce the interest rate by about 20 to 25%. (Depending on the provincial non refundable tax credit rate.)