But the repayment program also moves money around from those with higher lifetime incomes to those with lower lifetime incomes. This is partly because federal student loans are available only to those with relatively low family incomes while studying. But it is also because of the way the repayment system works.
There are two ways to repay student loans: through a mortgage-style system, with fixed monthly repayments over a 10- or 15-year term, or through the Repayment Assistance Plan (RAP), a program that sets payments at an affordable level for those with lower incomes.
Under RAP, the monthly payment is zero for a single person with an income below $40,000 (higher for those in larger families), and repayments cannot be more than 10 per cent of income.
Around 30 per cent of borrowers use RAP in the first year after leaving school, and about 20 per cent of all borrowers who have left school are in the system at a single point in time. Of these, more than 85 per cent are on zero payments, with no interest accruing. So, a reduction of interest rates to zero would not change anything for this group. The 15 per cent of RAP borrowers who are making affordable payments pay interest first, though if the payment is lower than the interest charge, the government pays the rest. Reducing the interest rate to zero would mean that their monthly payments would go entirely to reducing their principal. That would be one positive result.
The government also starts paying off the loans of borrowers who have been repaying their loans for 10 years after leaving school
A whole other group of borrowers – more than 200,000 at last count – are in default, meaning that more than 270 days has passed since they last made a payment. Meanwhile, interest is still accumulating on their loans. Their credit ratings will have deteriorated and if they ever file a tax return, any refunds can be taken by the CRA and given to the CSLP. Defaulters are not eligible for RAP but can enrol in it if they first rehabilitate their loan by making two regular monthly payments and either paying the accumulated interest or adding it to the amount they owe.
Borrowers must apply for RAP – enrolment is not automatic – and if accepted must reapply every six months. For borrowers who have been in RAP for 60 months, the federal government will start paying the principal and interest on the loans, ensuring that the loan is repaid in full after 15 years.
Loans can be discharged in bankruptcy if more than seven years has passed since the borrowers were in school. In addition, borrowers can apply to the court system for a discharge on the grounds of undue hardship if more than five years has passed since they left school. This is quite rare, but useful for those in extreme financial difficulty.
Finally, interest for all borrowers in repayment is currently suspended through to the end of , a temporary response to the labour market disruptions due to the COVID-19 pandemic.
Recent changes to the repayment program
In recent years, RAP has become more generous and more easily accessible. Substantial improvements were announced in the federal budget in 2021, including an increase to $40,000 from $25,000 in the income threshold below which no repayments are expected, and a reduction in the cap on the percentage of income that can go to student loan repayments to 10 per cent from 20 per cent.