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Interest rates on student debt

Interest rates on student debt

Whether you currently have student debt or are looking to take out a loan to put towards your education, the thought of rising interest rates can be downright frightening.

With inflation at a 30-year high in Canada, interest rates are on the rise as our central bank has started a series of aggressive rate hikes to bring inflation under control.

For savers, this is good news. Rising interest rates means earning more on money saved. 

For those in debt, this means that more of your money will have to go towards paying off interest and less towards the things you love.

When applying this to student loans, rising interest rates can provide mixed news depending on the type of loan you have. If you’re a student with a fixed interest rate on your student loan, you won’t feel much of an affect based on rising rates because your rate and payments are locked and will remain the same.

However, if you have a floating, or variable interest loan like the one handed out through the Ontario Student Assistance Program, it may be another story. 

If you’re in this camp, you may have already felt the affects of higher interest rates. These types of loans are typically based off of the prime rate, and as it rises,  you’ll be having to pay more interest over the lifetime of your loan until it’s lowered again.

Fear not however, with a few simple tips, and a certain mindset, you can counter these effects and get back paying off your debt in no time.

3 Tips that Students Can Use to Counteract These Affects


1. Pay them quicker

The simplest way to tackle rising interest rates is to pay debt down faster.

While you may have the option to keep your student debt payments static and pay the same amount each month, when interest rates rise, you may find that you’re falling further behind as you’re just paying off more in interest instead of chipping away at your principal.

Instead, if you’re in a rising interest rate environment, consider boosting your payments to account for the increase. By doing this, you’ll ensure that you keep yourself on schedule to pay down your debt in the same period. You’ll also save on future interest, since more of your money is going towards your principal than it otherwise would have.

2. Place Higher Emphasis on Debt v. Savings

It also helps to have a mindset shift when it comes to debt and savings in a rising interest rate environment.

When rates rise, it’s a good idea to get into the habit of paying down debt before saving money as it becomes more beneficial to save instead spending and going into debt. 

Just be sure not to over-extend yourself and focus on what makes the most sense. If you have a lot more debt than savings, you may want to focus any of your spare cash flow on paying down debt, if possible.

Savings money is good. Don’t get me wrong. However, when you owe a lot of money and are paying a lot of debt and interest, it may not make sense to save additional funds until you get your student debt under control.

3. Switch to a Fixed Rate

If you’re on a floating rate with your student debt, if possible, consider switching to a fixed rate. 

Your payment may initially be higher because of the nature of fixed rates often being higher than variable to account for future trends, but if it makes sense, at least you won’t need to worry about how high floating rates could change and what you’ll need to spend in the future. It will also be the same.