HALIFAX -- The Nova Scotia government is eliminating interest on provincial student loans in a move it says will save graduates hundreds of dollars over the life of their loans and encourage them to stay in the province.

Advanced Education Minister Kelly Regan says the savings on the average Nova Scotia student loan of $5,600 would total about $800.

Regan said the policy change is aimed at stemming the flow of younger Nova Scotians moving west after they graduate as they seek jobs to pay off big debts.

"Students ... indicated to us that this is something they wanted and they believed would make a difference and that's why we're doing it," she said Friday.

Regan said students will have to be Nova Scotia taxpayers in order to qualify.

The government said there are about 18,000 people who have borrowed loans and another 14,000 students with provincial loans who haven't started repaying them who will benefit from the policy.

Jonathan Williams, director of Students Nova Scotia, said the decision is a modest move that relieves some stress on students.

"To some extent the impact is on reducing peoples' concern and the worry you have that your loan is going to grow," Williams said.

He said he would prefer to see the province borrow a page from Newfoundland and Labrador, which promised in Thursday's provincial budget to provide $50.6 million over five years to convert provincial student loans into grants and freeze tuition fees for another year.

His group has recommended further changes to the Nova Scotia Student Assistance Program, including eliminating the maximum assistance amount for students attending public post-secondary institutions and reducing expected parental and spousal contributions.

Regan said the government does not plan to replace loans with grants.

"Newfoundland has a completely different fiscal situation than we do," she said. "It's a modest move but it's what we can afford."

The zero-interest program applies to graduates who started paying back their loans after Nov. 1, 2007, and took effect on March 20. It will cost the government about $1.6 million annually.

NDP education critic Maureen MacDonald said she fears the government is planning to help pay for the new policy by cutting a program introduced in 2009 that gives graduates who stay in the province a tax rebate.

The graduate retention rebate program allows university graduates to reduce their Nova Scotia income taxes by a maximum of $2,500 annually within the first six years of graduation.

"Lots of students are using it and they love it," MacDonald said. "The rebate is a great way to put money into the pockets of students who stay in Nova Scotia."

Finance Minister Diana Whalen said in an interview that the program is one of a number of tax credits under review but she wouldn't comment on whether it will be eliminated in the provincial budget to be released Thursday.

"It isn't showing good results here or in other provinces," she said. "You can see from our outmigration it doesn't seem to be having an effect."