Budget 1998
Canadian Opportunities Strategy - 3
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Helping Manage Student Debt

The Canada Student Loans Program provides financial assistance to students to supplement their own and their families' savings and earnings. Since 1964, the program has provided over $15 billion in loans to needy students for post-secondary education.

This year, more than 380,000 students -- about 30 per cent of students enrolled in universities, community colleges and vocational and technical institutes -- are supported by the Canada Student Loans Program at a cost of $530 million. An additional $120 million is paid to Quebec and the Northwest Territories to finance their comparable programs.

Under the program, the government pays interest on the loan while a student is in school.

For six months after graduation, interest accrues but the borrower is not required to make payments. After this grace period, the borrower is responsible for paying off the loan, usually over the next 91/2 years.

For those facing financial hardship, the federal government pays all interest costs for up to 30 months in the first five years after students have left school. This interest relief period was extended from 18 months in the 1997 budget.

The 1998 budget proposes the following measures to help individuals repay student loans (the first assists all borrowers to repay their loans; the rest help borrowers in financial difficulties cope with their debt):

• tax relief for interest on student loans;
• interest relief extended to more graduates;
• an extended repayment period for those who need it;
• an extended interest relief period for individuals who remain in financial difficulty; and
• a reduction in the loan principal for individuals who still face financial difficulties.

Tax Relief for Interest on Student Loans

The Challenge

• To help individuals repay their student loans.

The Action

• For the first time, all Canadians will get tax relief for interest payments on their student loans. Effective this year, they will be allowed to claim a 17-per-cent federal tax credit on the interest portion of the amount paid in the current year. The credit will apply to interest payments on loans under federal and provincial student loan programs.

Who Benefits?

• The measure will provide tax savings for everyone repaying their student loans -- about one million Canadians.

Improvements to the Canada Student Loans Program

The Challenge

• To help Canada Student Loans Program borrowers who are having difficulty repaying their student loans because of their financial circumstances.

The Action

Interest relief

Effective April 1998, changes will be made so that a person can earn more and still be eligible for interest relief. This will be done by raising the income thresholds used to qualify for interest relief by 9 per cent.

Then, beginning in 1999, partial interest relief will be available further up the income scale for graduates facing financial difficulty.

• Below the basic income thresholds, the government will continue to cover 100 per cent of interest.
• Above the basic thresholds, the government will pay 75 per cent, 50 per cent or 25 per cent of interest, depending on the individual's income, up to a limit where the individual remains solely responsible for loan payments.

• Income thresholds for interest relief vary with the size of the loan and the number of dependants.

• Repayment period extension

For individuals who have exhausted 30 months of interest relief, the lending institution will be asked to extend the loan repayment period to 15 years. This will lower monthly payments by nearly 25 per cent at current interest rates.

• Extension of interest relief

If, after extending the repayment period to 15 years, an individual remains in financial hardship, interest relief will be extended from 30 months to up to 54 months during the five years after leaving school.

• Debt reduction

For the minority of individuals who still remain in financial difficulty after these relief measures, effective this year, the government will reduce the loan principal if annual payments exceed, on average, 15 per cent of the individual's income. The maximum amount of assistance will be $10,000 or 50 per cent of the loan, whichever is less. To qualify, five years must have passed since the completion of studies and the individual must have exhausted interest relief.

Who Benefits?

• Together, the new interest relief measures will assist up to 100,000 more individuals.
• Over 12,000 individuals a year will benefit from debt reduction when fully phased in.

Performance and Accountability

To ensure that Canada Student Loans continue to provide as much assistance as they can to those who need it, the government is taking steps to ensure that both educational institutions and students use the program as it is intended. These steps include:

• dealing with students with a history of severe credit abuse;
• proposing changes to provisions in the bankruptcy legislation so that student loans will survive bankruptcy for 10 years after the completion of studies;
• working with provinces to strengthen the criteria for eligibility of educational institutions; and
• improving communications with student borrowers.

The federal government will work with the provinces that participate in the Canada Student Loans Program to better co-ordinate federal and provincial student financial assistance and move toward a single loan product.

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The Strategy

Helping Canadians Upgrade their Skills

Throughout their working lives, Canadians increasingly need to upgrade their skills to keep their jobs, or to obtain new ones. While they recognize the need to keep pace with the changing workplace, they often have limited access to adequate resources when the need or opportunity occurs to upgrade their skills.

For many, the most readily accessible source of funds may be their registered retirement savings plan (RRSP) -- a resource that, until now, they could not use without permanently reducing the amount of their retirement savings. There are few things more critical to ensuring an adequate income in retirement than ensuring a good income when working. Providing opportunity to take periods away from work to improve skills is an important way to make sure that happens.

Tax-Free RRSP Withdrawals for Lifelong Learning

The Challenge

• To give Canadians greater access to funds to upgrade their skills.

The Action

• Effective January 1, 1999, Canadians will be allowed to make tax-free withdrawals from their registered retirement savings plans for lifelong learning.
• Individuals with RRSPs may withdraw up to $10,000 per year from their plans, provided they are enrolled in full-time training or higher education for at least three months during the year. Students with disabilities may qualify even while studying on a part-time basis.
• More than one withdrawal can be made in a year as long as the annual limit is not exceeded. Further withdrawals can be made for a period of up to four years, provided that the total amount does not exceed $20,000.

Withdrawals must be repaid in instalments over a 10-year period. However, individuals may choose to repay more than the scheduled amount in any year. All repayments are without interest and cannot be deducted for income tax purposes.

• Contributions must remain in an RRSP for 90 days before they are eligible to be withdrawn under the plan.

Who Benefits?

• At least six million Canadians have RRSPs with total assets of $200 billion. Individuals with RRSPs may borrow from their plans for their own full-time educational purposes.

Tax Relief for Part-Time Students

Canadians know that the realities of the new job market require them to continually upgrade their knowledge and skills. A growing number are doing this through part-time study while also balancing work and family responsibilities. The Canadian Opportunities Strategy contains measures to provide further support in meeting these challenges.

Education Credit for Part-Time Study

The Challenge

• The education tax credit supports only full-time study, yet many Canadians pursue lifelong learning on a part-time basis.

The Action

• Beginning in 1998, part-time students in eligible programs will be allowed to claim an education amount of $60 for each month during which they were enrolled in a course lasting at least three weeks and involving a minimum of 12 hours of course work each month. An eligible student may claim either one part-time or one full-time credit in respect of a particular month, but not both. Part-time students may already claim a tuition credit to cover tuition and ancillary fees.

Who Benefits?

• This measure gives part-time students comparable benefits to full-time students (who may claim an education credit of $200 a month). About 250,000 part-time students will benefit.

Child Care Expense Deduction for Part-Time Study

The Challenge

• Changes are needed to encourage and assist lifelong learning among Canadians, many of whom are parents with the added costs of caring for their children.

The Action

• This budget proposes to provide further assistance to part-time students by allowing single parents to claim a child care expense deduction for periods during which they are enrolled in part-time course work. In a two-parent family, the higher-income spouse will be allowed to claim expenses arising out of part-time education of the other spouse.
• For two-parent families, the deduction would be equal to one of the following amounts, whichever is the least:
  • actual expenses; or
  • two-thirds of earned income for the year; or

  • for each month for which a part-time education credit is claimed, $175 per child under age 7, and $100 per child age 7 to 16.

Who Benefits?

• About 50,000 part-time students with children will now be able to deduct child care expenses incurred while they are enrolled in part-time studies.

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