There’s a trope out there that goes something like this: “Loans are unfair because interest on the loans means that needy students pay more in total to go to school than students who don’t need a loan“. If it were true, this would indeed be problematic. But the thing is, for the most part, it’s not.
Let’s follow two hypothetical students: Claudia and Eveline. Claudia can manage to pay $25,000 for her four years of tuition, upfront; Eveline cannot, and she borrows $25K from Canada Student Loans and her provincial student aid program over four years. Assume that inflation is a constant 2%, and that interest during the repayment period is 6.25% (over the last few years, real interest rates have floated between 400 and 450 basis points above inflation).
Student loans carry zero interest during the in-study period. This means students actually make money while they’re borrowing because inflation eats away at the value of the loan before they’re required to pay it back. In Eveline’s case, she effectively makes $1,125 between the September she starts and graduation day.
Then, of course, things start to work in the other direction. Assuming Eveline takes eight years to pay off her student loan, she ends up making $4,321 in interest payments (figure is net of inflation). Take away the $1,125 that Eveline “made” during the in-study period and the net interest cost comes to $3,196.
If that were the end of the story, the people who claim loans are “unfair” would be right; we would be discriminating against the poor. But that’s not the end of the story because people who get loans usually also get grants.
If you’re an independent student making less than $38K per year and you apply for aid, you are nailed-on for an extra $2,000 per year – that’s $8,000 over the course of a degree. Ditto if you’re a dependent student and your parents make less than $38K. If you’re a dependent student and your parents make less than (roughly) $76K, you’re nailed-on for another $800/month – or exactly $3,200 over four years, which wipes out the interest cost of the loan. Plus, of course, you get 15% of all interest paid as a tax credit – which means you actually come out ahead by a few hundred dollars.
Are there borrowers who don’t come out ahead? Yes. Those who borrowed but had family income high enough that they didn’t qualify for the middle-income grant likely wouldn’t receive a grant to offset the loan interest amount. Borrowers who take more than eight years might end up with higher interest charges not covered by their grants (and possible remission). There are enough variables here that it’s hard to say how many people this might include. But remember – the base population that doesn’t get sufficient offsetting grants consists of dependent students with family incomes over $80K, that’s *maybe* 20% of all borrowers (and not the poorest 20% by any means). Or to put it another way: probably something like 80% of borrowers are receiving more in subsidies than they pay in real interest over the life of their loan.
That’s a good thing – an outcome of our generous, if opaque, student aid system. We should acknowledge it, celebrate it, and most of all get the usual suspects who adore this talking point to shut up about it.