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Interest rate increase: What it means for medical students and residents who are borrowing to pay for school

As the Bank of Canada and other central banks around the world continue to raise interest rates in efforts to rein in inflation, borrowing has become considerably more expensive.

Following the Bank of Canada’s direction, Canada's six big banks followed suit and raised their prime lending rate. Many borrowing products, such as lines of credit and variable-rate mortgages, are based on the bank's prime lending rate.

As the economy continues to recover and grow, and inflation remains elevated, the Bank says that it expects interest rates will need to rise further to maintain what it regards as a healthy level of long-term inflation, 2%.

How might this affect you, as a medical student, resident physician, or new-in-practice physician?

Government student loans

If you have a student loan, there’s currently no change. In April 2021, the Government of Canada announced that no interest would accrue until March 31, 2023 on the federal portion of Canada Student Loans.

Lines of credit

If you have a line of credit that you used or are using to finance your education, you will be feeling the impact.

For instance, if you’ve used $100,000 from your line of credit and were paying 2.45% at the beginning of 2022, your interest cost per month was $204.17. At the current rate of 5.45%, your cost will be $454.17 per month — a sizeable increase.

Let’s break things down further to show how this will affect borrowing throughout your studies.

As a medical student and resident physician you can borrow — up to $350,000 at some financial institutions — to finance your education.

Some banks also allow you to capitalize your interest payment, meaning rather than you making monthly interest payments while you complete your training, the monthly interest payment is added to your outstanding balance. As interest rates increase the amount you can borrow to pay for things like tuition, housing, and food is gradually eroded, with more of that limit going towards the increasing interest costs.

With interest rates rising it’s more important than ever to borrow only as much as you need in order to avoid unnecessary debt. Explore healthy money habits to help you budget through med school, and tap every source of income, including scholarships, bursaries, and grants, using MD’s ultimate guide to financing your education.

What happens now?

If you are a resident, now earning a salary and with student debt to repay, you are likely asking yourself a lot of questions as the cost of borrowing increases: do I pay down my debt faster? Which debt should I pay down first? Can I start saving/investing?

The answers to these questions are never one-size-fits-all solutions; each person’s situation is unique. Our Early Career Advisors at MD Management Limited are specialists in working with residents and new-in-practice physicians to help navigate these complex questions. Book an appointment today to speak with an MD Advisor.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

All mortgage applications are subject to Scotiabank’s standard credit criteria, residential mortgage standards and maximum permitted loan amounts.

All banking and credit products and services are offered by The Bank of Nova Scotia (“Scotiabank”). Credit and lending products are subject to credit approval by Scotiabank.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.