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.