Can reforms to government-funded loan programs pull us out in time?
THE CRUSHING WEIGHT of student debt.” “Student debt bankrupting a generation.” “A financially challenged generation is slipping through the cracks.”
A quick glance of recent news headlines is enough to make any 17-year-old kid wary of entering the institutions of higher learning—and any current student sick to his or her stomach.
Nearly two million Canadians have student loans, totalling $20 billion worth of debt in the form of federal and provincial government loans, credit cards, lines of credit, and personal loans.
As if that figure wasn’t enough to raise concerns about student debt levels, the federal government’s decision to raise the $15-billion cap on its federal student loan program last fall—exceeding the threshold of the program four to five years earlier than previously anticipated—signified the growing importance of student debt to both students and policy-makers alike.
Solutions to student debt have been kicked around by various organizations. The Canadian Federation of Students (CFS) advocates for the progressive reduction of tuition fees. Although this seems like a simple enough solution, increased enrolment rates encouraged by lower fees force universities to limit the number of undergraduates they accept each year because of increased costs and overcrowding on campuses. This unintended effect is in direct conflict with the CFS’s mandate to lower tuition fees in order to increase the number of Canadians receiving a university education.
Some members of the Occupy movements have suggested completely wiping out student debt. Similar to subsidizing tuition fees, debt forgiveness of university graduates acts as an income transfer from the poor to the rich. Completely erasing the debt of those most likely from middle- to high-income households exemplifies the same dynamic that triggered the Occupy movement: The unfair way in which the poor are forced to pay for the economic choices of society’s wealthiest.
Governments and policy-makers need to strive for long-term solutions to high levels of student debt, as well as increased delinquency and default rates amongst graduates. The key, however, is not in lowering tuition fees or even erasing decades worth of debt. It lies in reforming the loan-repayment system itself.
One of the main factors contributing to loan repayment is income after graduation. In Ontario, for example, students are expected to start paying back their provincially funded loans six months after graduation—but few students jump from university classes into well-paying jobs. Many choose to take time off before starting another degree, volunteer to add to their skill set, or take on an unpaid internship.
Income-contingency repayment programs require graduates to reach a certain income level before they are required to make payments on their debt. Although this approach has its flaws—it extends the time it takes for women who leave the workforce to have children and those with less lucrative jobs to pay off their loans—it does lessen the financial burden on graduates who start out in the working world in poorly paid positions.
Two other key considerations are the conditions of loan repayment and the amount of debt issued.
Canadian graduates tend to make higher payments on their debt with respect to their income after graduation because they face high interest rates; however, throughout their schooling, interest on their loans is paid by the government. Charging one consistent, low interest rate throughout the loan period—as opposed to subsidizing interest payments during school and raising them dramatically after graduation—would reduce Canadian students’ debt to income ratio significantly.
The Canadian government attempts to ease the total debt of students by setting a maximum limit on the amount of debt a student can acquire through government-funded loan programs. If the total amount of a student’s loan in a one-year period exceeds this threshold, the Canadian Millennium Scholarship Foundation pays the difference.
Federal and provincial governments could consider other criteria of debt forgiveness. For example, in Germany, students who complete their studies early or perform at the top of their class receive debt remission of up to 25 per cent on their loans for that year. Universities and colleges themselves can also make use of these merit-based solutions by offering more scholarships for good students.
The future of Canada’s economy lies in its possession of a highly skilled and educated workforce—and the strength of our post-secondary education system lies at the heart of this endeavour. Not only must we ensure that we are producing high-quality graduates, but we need to ensure these people—and our economy as a whole—aren’t burdened by debt. Otherwise an entire generation will slip through the cracks of our post-secondary system.