The Bank of Canada, pictured above, raised the overnight interest rate on July 12 for the first time in nearly a decade. 

Earlier this month, the Bank of Canada announced that the overnight interest rate was increasing by .25 percent to the now current rate of .75 percent. The hike on the overnight rate will bring up interest rates on student loans for Canadian student loan borrowers.

For the past seven years, Canada’s central bank has either left the overnight interest rate steady or decreased it to near-historic lows. This marks the first interest rate hike in the country in nearly a decade.

What is the overnight interest rate? The overnight rate is the base rate at which banks lend money to one another on a regular basis in Canada; in other terms, it is the Canadian policy interest rate. The changes made to the overnight interest rate are felt by consumers because interest rates on different financial products will change accordingly to the overnight rate.

Student loan borrowers in Canada, who will face higher interest rates on their educational loans, are dealt a tough hand by this news as higher education becomes a bit more expensive in the country. Canadian student loan borrowers with a variable interest rate will see their rates go up almost immediately while fixed rate borrowers can expect the same rate. Meanwhile, borrowers who have yet to take out a loan will be forced to deal with a higher fixed or variable interest rate than they would have had to previously.

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In Canada, federal student loans do not require payment until six months after graduation, much like the deferment period in the United States. Those loans also do not accrue interest during that six month period, much like subsidized federal loans in the United States. Students can select either a fixed or variable interest rate.

The Bank of Canada made the decision to hike up the overnight interest rate after years of the Canadian economy performing strongly due to lower rates.

The Bank of Canada had the following to say in a press release: “Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. Growth is broadening across industries and regions and therefore becoming more sustainable. Household spending will likely remain solid in the months ahead, supported by rising employment and wages…”

For reference, the U.S. Federal Reserve recently raised interest rates on federal student loans after steady economic growth. Interest rates on undergraduate federal student loans jumped from 3.76 percent to 4.45 percent, while graduate loan interest rates were raised from 5.31 percent to 6 percent. Additionally, the private marketplace followed suit, and student loan lenders have been raising interest rates on private student loans in recent weeks.

Image Copyright © Brent Eades