If you haven’t heard, the Bank of Canada raised its key overnight lending rate by 25 basis points last month. And while mortgage affordability is usually the first thing that comes to mind when people discuss an interest rate hike (or drop), students heading to university or college may also be affected by this move.
As the prime rate rises, so does the cost of borrowing money, or taking out any type of loan. Here’s where students can expect rising interest rates to affect their finances come September:
Student lines of credit
To supplement the cost of tuition, books and residence, many post-secondary students use a student line of credit. It’s a flexible solution, typically with lower interest rates than credit cards or government loans. However, when interest rates rise, so do the floating rates tied to lines of credit. The interest rate on a line of credit is calculated using the banks’ prime interest rate, which fluctuates, and often follows the Central bank when it changes its rate.
So while students can expect the payments on their line of credit to increase, banks generally only require students to pay the interest on their balance while they’re still in school.
For those students paying rent, a hike could be on the horizon.
As mentioned before, mortgage rates are affected by interest rates. And as such, home owners may face higher costs to service the loans on their properties – including investment properties that are being rented out to tenants. So as mortgage loan payments increase, landlords may increase the rent to make up for their loss.
Government student loans
Federal and provincial student loans are popular among post-secondary students since they are interest free as long as you’re still in school. But the cost of carrying them after you graduate is also tied to the prime rate. Currently, federal student loans carry an interest rate of prime plus 2.5 per cent. And if the Bank of Canada continues to raise rates, your student loans may be more expensive to service after you graduate – meaning you’ll be required to pay back more in interest.
The Bank of Canada has indicated they are much more confident in the Canadian economy than they have been in several years. This indicates there could be more rate hikes to come. And if that’s the case, students should start to weigh their financial obligations wisely before taking on a new rental agreement or applying for loans to fund their post-secondary education.
While rising interest rates typically mean the economy is doing well, it also means more interest being piled on to debts that could possibly take years longer to pay off. Thankfully, there are ways to save when you are a student, other than eating ramen noodles for dinner every night.
For example, you can sign up for a Tax-Free Savings Account (TFSA) and start earning interest on your savings, no matter how much or how little you may have. A TFSA allows you to grow your money quickly and take it out whenever you want, tax-free. Compare TFSA rates at RATESDOTCA today; any extra earnings are better than letting just your savings simply sit in a regular account.