Student Loan Interest Relief: How poor do you have to be to qualify?

by Julian Benedict et al.

Many people think that if they fall o­n hard times, Interest Relief (IR), or the program whereby the government pays your student loan interest o­n your behalf for up to 30 months, will protect them from default. In reality, qualifying for IR is difficult; moreover, if you do qualify, you and your family will indeed be living very modestly.

To qualify for IR, you must prove the government you (and your family) earn below a certain income level depending o­n your total student loan debt. But the ratio is based o­n your GROSS rather than NET income. In other words, while your student loan payments are paid with your after-tax income, the system designed to assess your eligibility for IR is based o­n your total income before payroll deductions. As well, IR does not factor in where you live. So, Canadians living in sky-high housing markets like Vancouver or Toronto are disqualified at the same income levels as those living in cheap rental markets elsewhere.

In the spirit of fair play, we decided to reformulate the existing IR eligibility table, but using a student loan borrower's net rather than gross income. As expected, the situation gets progressively worse depending o­n how much you owe:

A student loan borrower with a monthly student loan of 750.00 dollars (9,000 per year in after-tax dollars) would not qualify for IR if they made a penny over 34,812.00. But when you factor in income tax of approximately 5,600.00 per year, their real income is just 29,249.98. Notwithstanding their lower after-tax income, this borrower is still expected to pay about 30 percent of their total after-tax income in student loan payments! If most people pay about 40 percent of their after-tax income for housing, that leaves o­nly 30 percent for all other expenses.

A two-person family with monthly student loan payment of 900.00, (10,800.00 per year in after-tax dollars), would be disqualified from IR if they earned a penny over 48,960.00. If you minus their income tax deductions from this amount--approximately 9,863.77--the family actually earns o­nly 39,096.23. This family's annual student loan payment, however, is nearly the same amount as the deductions they will pay in income tax over the same calendar year. Nevertheless, they would still be expected to pay about 27% percent of their total after-tax income o­n student loan payments.

A three-person family with a monthly student loan payment of 900.00, (10,800.00 per year in after-tax dollars), would be disqualified from IR if they earned a penny over 59,352.00. But that total is o­nly 46,251.12 after taxes. This means that a family of three would still be paying about 23 percent of their after-tax income o­n student loan payments. Surely it is unreasonable that the government ignores the fact that this three-person family has 13,100.88 fewer dollars available to pay student loans.

The Coalition wants to overhaul the IR system to address these issues.

* All income tax deductions listed here are best estimates--tax rates continue to change yearly, and provincial tax rates vary throughout the country.

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