Student Debt in Canada

For many people financing higher education ranks third in importance after buying a house and a car. A mortgage may have a 25-30 year repayment period and an interest rate which can be renegotiated. Purchase of a car can involve a loan and associated interest costs and usually has a shorter term than a mortgage. The purpose of a student loan is also to invest in capital, but human as opposed to physical capital. The anticipated payoff is the expected lifetime earnings and lifestyle.

Much of public debate on student debt discusses whether it is too high and too much of a burden on the borrowers at this stage of their careers. In contrast, home and car loans less frequently attract this kind of attention, although recently the Bank Of Canada, while keeping rates low, have cautioned people about borrowing which seems odd.

Students (and their parents) argue that while students benefit from higher education, so does the state through the taxes they pay once they are working. Others contend that university graduates have higher lifetime earnings than others and such a subsidy is not warranted. Quebec students are prepared to cause civil unrest in the name of keeping fees low if not free.

Here I suggest that a combination of preplanning and the management of time and income from a young age can reduce if not eliminate the debt which a student has upon graduation. I admit that it’s difficult for a parent or grandparent to persuade children that they should save for their education, as opposed to spending today for some immediate gratification, but possibilities do exist.

Each year in the US, Sallie Mae (SLM Corporation) publishes a study “How America Pays for College.”  For 2012, a rough answer is $21,000 to $24,000 a year. Sources of funding include student borrowing (15%), parent borrowing (9%), parent income and savings (28%), student income and savings (12%), relatives and friends (4%), and grants and scholarships (29%). While the cost level and the breakdown of funding may be different in Canada than in the US, the categories of income are roughly the same.

How to reduce student debt?

School children can start to earn as caregivers (children and others) and by doing chores such as yardwork. Teenagers can earn $10 an hour as babysitters. $10.25 is the minimum wage in Ontario for more regular work. Once enrolled in a university or college, there are part-time jobs during the school year and summer jobs during vacations. Online jobs are now available where the person does not have to leave their home. A substantial cost of higher education is living costs. If the student can live at home, this cost is reduced.

Different courses have different fee structures. Medicine, law, engineering and computer studies have higher annual fees, but banks will be willing to lend to such students because their future income earning ability is sound. And students are willing to borrow because they know that as well. This is less so the case for a BA in arts, where there is an oversupply of graduates and far less well paying job opportunities.

Australia has an income contingent scheme for financing higher education.
While details can be gained from the web, the gist is that the government establishes the price of a student’s academic program and pays the university this amount. The student then incurs a debt of the same amount which is repaid over time once the student starts to earn. Collection is made through the income tax system, with repayment depending on income earning ability. No interest is charged until payments start to be made. There were strong protests when the policy, proposed by Bruce Chapman, an economist, was introduced but it is now fully accepted. Some problems do arise when a borrower leaves the country and pays no Australian income tax. Proposals are now afoot to address this issue.

A short personal reminiscence when costs were lower but so were incomes. There was a great deal of time during each term which was not spent in attending classes or studying in the library or at home but in a variety of immensely enjoyable but not academically rewarding pastimes. The time could have been spent earning part time income. Many students did just that working in the library, cafeterias, maintaining the grounds, or acting as research assistants, teaching assistants and markers for large courses. Between terms at Xmas, I worked sorting mail on the graveyard shift at the post office and selling booze in the liquor store. The summer break provided a longer opportunity to earn money and I did so as a deckhand on a tugboat, as a tourist bus driver in the Rockies, in construction driving a cement truck and in a bank. Friends had equally varied and often more rewarding summer jobs.

When people complain about student debt, a few questions about their lifestyle and where savings might be possible are worth asking.

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3 Responses to “Student Debt in Canada”

  1. Paul Henry Says:

    Hi Chris, I came back here to reread and comment on your 03June piece, which I’ll get to in due course; however, your latest post on student debt caught my interest. My comments below are based not only on what I’ve read or heard about other parents and students, but also on first-hand experience, which e may or may not be representative. I had a modest student loan after graduating from university 30 years ago. Three of my children are now working full-time and have paid off or still have student debt. Another child now 23 years old is still accumulating student debt. In contrast, I know another family very well with 3 adult children (one working full-time) none of whom has student debt, thanks to financial support from parents and their c
    savings from part-time work. .

    1. An indirect effect or benefit of a student loan is that a young person may start to focus on and learn about money management earlier; e.g., making a budget, tracking how one’s money is actually spent, learning the difference between necessary and discretionary expenses, submitting annual tax returns to get HST rebate cheques 4 times a year, or the rules on transferring or holding onto ones education expenses deduction. This experience and knowledge can only help young people later on. Many commentators have cited the dismal understanding of matters matters of many adults today. Few schools offer serious instruction to young people in this subject. The sooner they learn about money management and investing the better. For example, one of my children only focused recently on the idea of the actual cost of borrowing. Aware of his large student loan, he thought it would be inconsistent to save say 10% or 20% of all summer or part-time earnings, as advocated in money advice books such as The Wealthy Barber. When reminded that his student loan isn’t costing anything right now, he realized that saving and investing well 10% or 20% of it could help ease the repayment of that debt when due six months’ after graduation. He’d heard before about and now understood why a few fortunate students invest student loan money they don’t really need and spend or save the interest.

    2. Whether a student or a non-student, for that matter, actually uses “the 10% or 20% solution” is another matter. A horse can be led to water, but won’t necessarily drink, At some point a parent can no longer actively persuade, but his or her good or bad examples or counsel may may continue to influence. A lot depends on how well any person practices restraint or foregoes immediate gratification, a point you touched on above. Spending more money than one really has is a big social problem these days. It has been fostered for many years by low interest rates and ubiquitous credit cards etc. and unfortunately, passed on to children and young adults. A result of this culture and affluence is quite likely many “soft” young people, too often engaged in entertaining trivialities and unable to pursue serious activities. Experience and habitually sound money management could help.

    3. It may be possible, as you suggest, for children to start to earn money babysitting etc. But the amount of money they’ll earn is not significant. What’s more important is that they get into the habit of not spending all they make but learn to save for later: i.e., it’s the good money habits that count. These days there are many teenagers and young adults doing minimum wage work, e.g,, in the restaurant and retail industries or telemarketing. The competition and the turnover in such jobs is very high, given poor wages and exploitative working conditions. As well, it’s well known that compared to 20 or 30 years ago, current students and recent graduates cannot easily find part-time or full-time jobs. One hears of a few students hired by a federal government department in the summer, but many more young people in retail sales jobs or in restaurant work one or two shifts a week. The rest of the time they pursue immediate and certainly important interests, e.g., socializing in person or online, playing video games until 2 am, and rising at 11 am or noon. Few of them can be influenced sufficiently to look for more part-time work or — heavens forbid! — get a bit of experience and add to one’s CV by doing volunteer work with, for example, animals, seniors or Amnesty International.

    4. Finally, returning briefly to my points above on more financial understanding, it may be a shock when a student becomes aware of the length of time, it will take to pay off the student loan. That is by calculating at a certain annual salary or monthly take-home pay, the amount of student loan payments manageable over and above normal living expenses, not to mention new debt.
    Above you mention correctly that banks offer loans to students entering the professions. Loan officers are quick to call these students on the phone right after they’re accepted into law or medical school. It’s good, long-lasting business. But contrary to what many believe, unless these students have wealthy family’s or some personal savings, practicing their professions later, starting families or managing decent work-home balances are can be very difficult. As well there’s often no early debt-free transition. For example, I know of veteran family doctors, speaking from long personal experience, who advise would-be medical students to become specialists, because if not it could take well over half their careers in general practice to pay off the massive medical school debt.

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