All Posts Tagged With: "debt"

News comes as study reveals rapidly growing tuition rates

Photo by feelsgoodlost on Flickr

As some American students continued their Occupy protests on Wednesday, President Barack Obama was being cheered by other students in Colorado where he announced he will speed up his initiatives to help students overcome debt.

“We should be doing everything we can to put college education within reach for every American,” the President said in what CNN describes as a “campaign-style event.”

Obama announced that a program to limit the repayment of federal student loan debt to 10 per cent of discretionary income will start next year, instead of the year after. And he said that students will be able to consolidate public and private loans to save on interest charges.

Continue reading Obama offers students debt relief

Fees are up 4.3 per cent this fall: Statistics Canada

Photo courtesy of kenteegardin of www.seniorliving.org on Flickr

There tends to be a lot of talk this time of year about how high tuition fees have become. This year, the debate has been especially loud, because it is an election issue in more than one province.

And that was before Statistics Canada revealed today that tuition is up 4.3 per cent over last year to an average of $5,366 for undergraduates. Inflation is estimated at 2.7 per cent, which means tuition costs are growing faster than most prices.

The obvious problem with high fees is that no one likes to pay them. And when the issue is raised by politicians, it’s usually raised in terms of access:  the economically disadvantaged won’t or can’t seek higher education if the price tag is too high. Research has suggested that children from lower-income families are less likely to go to university than richer students, but why that’s the case is a complex mix of social and economic factors, actual cost being just one, according to this study by Statistics Canada. As conservative commentators have noted, even now where tuition is highest, participation rates remain relatively high even among low-income students.

Continue reading Why the tuition problem is worse than you think

Two-thirds think they’ll pay off debt in five years

Nearly half of Canadian students say they will have either have no debt or owe less than $10,000 upon graduation, according to a new study from BMO Financial Group. In fact, the average owed by all students is $18,800, according to Statistics Canada. On top of that, nearly two-thirds  (63 per cent) think they will be able to pay off their student debt within five years of graduation. The default repayment period for government loans is nine-and-a-half years. The study included 625 college and university students and was conducted by Leger Marketing.

New programs for medical and law students are about getting professionals where they’re needed, not student aid

This summer, Dawson City, the second largest community in the Yukon, lost half its doctors when one of them decided to take a year-long sabbatical. The territorial government is currently building a hospital in the town, since the 1960s anyone who has to be held overnight for medical treatment has to be airlifted to Whitehorse, but many in the community question who’s actually going to work there.

Whitehorse, home to the territory’s only hospital, is facing a severe and growing doctor shortage and specialists only pass through a few times a year. Serious cases requiring emergency specialist care must be sent south, usually to Vancouver.

Throughout Northern Canada the story is the same: shortages of doctors and other professionals, like lawyers.

Certainly, there is a shortage of doctors throughout much of the country but not having a family doctor is one thing when there are hospitals and walk-in clinics nearby; it’s a whole different story when the nearest doctor–of any sort–is a several hundred kilometre flight away.

Manitoba recently introduced programs designed to encourage graduates of medicine and law to work in the province’s North, by giving them tuition refunds in exchange for work in isolated communities.

This isn’t about student aid, it’s about providing incentives to encourage grads to work in places that need their skills.

Some have criticized these programs on the basis that they put pressure on poorer students to work in the North, rather than pursue specialties. While I understand that some people have a sort of moral objection to student debt, if there are any graduates who can handle debt it’s medical specialists who will graduate to high salaries.

Medical students, just by the virtue of being medical students, have access to large loans and lines of credit. Banks are willing to lend because medical students are essentially guaranteed high salaries on graduation.

This new program doesn’t pressure students from poorer backgrounds into choosing the North over a specialty, it gives students a choice between paying off their debt by pursuing higher paying positions or working off their debt by practicing in areas where there is a great need.

If we want to talk about inequality, let’s talk about the fact that the far majority of medical students come from well-off backgrounds. At the Université de Montréal a full 45 per cent of medical students have backgrounds in the richest 20 per cent of the population, only five per cent come from poor backgrounds. The problem isn’t how medical students from poor backgrounds choose to pay off their debts, it’s about getting them in to medical school in the first place.

Or we can talk about the fact that Northern Canadians–a large percentage of whom are Aboriginal–are denied essential government services provided to southerners because few people want to provide them.

Let’s remember that medical education, while it may be expensive, is still funded by society, there’s nothing wrong with the state encouraging doctors to do the right thing and provide medical care to Canadians whose access to proper treatment is severely limited.

Other provinces with large northern regions would be wise to imitate these programs and the federal government should do the same for the territories.

Financial literacy a serious gap in modern education

Students at Concordia University who want to spend some time in their university library have to say no to a credit card on the way in, then again on their way out, every time they visit the building.

“It’s right in front of the stairs to go up into the library,” Concordia student Brandi Goulding told the McGill Daily last week. “So if you are choosing to study in Concordia’s library, you have to say no or listen to their spiel every time you walk by.”

Credit cards available to anyone who asks for them is a relatively new phenomenon, and that means that the education systems haven’t caught up with the modern reality. And it’s time they did.

Consumer debt in Canada is now over $41,000 per person. That’s more than 2.5 times what it was 20 years ago, according to a report by the Certified General Accountants Association of Canada.

What’s even more surprising is that report also found that Canadians are ready to take on even more debt if it means maintaining their preferred lifestyle. What is lacking, though, is an understanding of what debt means, what interest rates mean and what credit ratings mean.

As people are being targeted at ever-younger ages for credit cards, debt is accumulating before people even have their first jobs or any means of bringing their finances back into the black.

Partially because of this increase in debt levels, and largely because people hate being deep in debt, there is a growing movement to teach personal financial strategies as part of a standard high school or university curriculum.

It’s time that movement came out of the back room and became reality.

Financial literacy is increasingly important to being successful in the modern world. And until we teach it along with basic arithmetic, reading Shakespeare and playing dodgeball, we are failing our youngest students.

Students have plenty of reasons to be angry and frustrated

The Toronto Sun ran an article yesterday on the really bad summer employment situation for students. Of course I touched on this topic here already, but the Toronto Sun does add a new note of hysteria to the situation. It presents students as very angry and frustrated. And it connects the problem with the cost of education.

Lack of summer jobs, rise in already lofty tuition fees forcing university students to sink deeper into debt.

First, an observation. I don’t consider the Toronto Sun to be trend-setting media by any stretch but their politics are well established. When the Sun starts reporting on high tuition and debt burden among students as problems then it’s time to pay attention. These are not their usual political sympathies.

The situation with the summer job market for students, however, is a slender hook for this story. It’s well understood that this summer was a very bad time for a variety of reasons and this sort of perfect storm won’t soon be repeated. So the real story isn’t that students are heading into the new academic year down however much money they might have saved over the summer. A few thousand dollars more or less, when compared with total educational debt, just isn’t a big deal anymore. The story is the situation in general.

Students are frustrated with the cost of education and their future job prospects because they’ve been fed a load of crap and they know it. Increases in the cost of education are continually justified with reference to future income potential but the job market for your typical bachelor degree simply is not what it once was. More than that, it’s flatly irrational to suggest that the competing trend – to send more and more people through post-secondary education – won’t have an effect on the marketability of the resulting credentials. Downward pressure on the job market is very well understood at this point. But you’d think educational institutions and their promoters have never heard of the concept.

Your average post-secondary student probably isn’t thinking about these things in quite the same terms. But students are aware of their personal situations. They were promised an awful lot when they signed up for university or for college. It was supposed to be the “right” thing to do. And now, partway through, they find they can’t even score summer jobs spinning cotton candy at the Exhibition. It rather does tend to bring all the other frustrations and doubts to the surface.

This is a big topic all around. It touches on a lot of what’s fundamentally wrong with how we market and present post-secondary education and with deeply held political illusions on the topic. The summer job market, this year, is just a lightning rod for the frustrations that students feel. Unemployment is scary and frustrating. And for some, unavoidably, it’s just a dress rehearsal for the real scare they’ll face upon graduation.

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Questions are welcome at jeff.rybak@utoronto.ca. Even the ones I don’t post will still receive answers, and where I do use them here I’ll remove identifying information.

Debt-ridden students are still on the hook for interest six months after graduation

The term “grace period” as it applies to student loans is misleading and confusing and should be scrapped, an advocate for the rights of borrowers said Thursday after filing a formal complaint against Human Resources and Skills Development Canada.

The term has come to mean two different things depending on which federal policy is looked at, argues Mark O’Meara of Canadastudentdebt.ca.

According to new credit card rules adopted by Ottawa this month, “grace period” means banks can’t charge interest on new purchases for 21 days.

But O’Meara has been fighting with the Human Resources Department for months over its use of the term as people with student loans are still on the hook for interest during the six-month “grace period.”

The term merely means students don’t have to make payments for six months after graduation while they look for work.

“Here we have one legislation using grace period as one thing and another legislation using this term inappropriately,” he said.

O’Meara said grace period “implies” an interest-free/no payment term and meant that up until the early 1990s with regard to student loans. The government has since changed its policy and, as such, should change the name of the provision as well.

“(They should) use something that’s more appropriate,” he said. “Something like payment and interest deferral period. That would be clear.”

Don’t let fear of debt keep you from upgrading your education

Some mail I received recently:

I’m turning 25 this year and am considering more and more what to do with my life and how to get there. I never finished high school, then years later got my GED certificate. Since I was 18 I’ve been working unfulfilling dead-end jobs, and it’s wearing on my soul. I’ve been considering college and university seriously for the last year and a half, but I feel lost. I don’t know where to start. I don’t know how I can pay for school and I also don’t know which programs to enroll in. I’m not sure what I really want to do in life. I always feel weighted to choose between smarter more practical choices, or really pursue my desires. I’m ready to work for my dreams, but I just need clear objectives, and some paths I can take. Thanks.

There’s a heck of a lot to that letter. And it reads like something I could have written myself about eight years ago. So I’ll start with a little biography.

I did graduate from high school (with uninspiring grades) but then I declined to continue my education. I didn’t begin to look seriously at a return to school until I was twenty-six. At that time, I didn’t have very distinct ideas of where I wanted to end up, but I did have a general sense that I wanted to do something more with my life. I decided to pursue an English degree not because it seemed at all practical (surprise!) but rather because it’s the only thing I really cared much about. My idea then, and I can at least attest that it’s worked for me, is that you do what you care about and things have a way of working out.

Now I don’t know much about how a GED is received by universities but I can promise I wasn’t a very strong applicant when I applied. I had to fight my way back into the system for even a chance to prove I could handle university. So you may find you have to jump through a few hoops to make it happen. Or you may not. They may simply admit you directly. But either way, at the undergraduate level, you should find the chance is there to get back on the inside if you’re willing to do what it takes to get there.

One of the hardest things about approaching education as an adult student is knowing where to start. The path from high school to university and college is so well traveled that you can’t possibly miss it. Guidance counselors are just waiting in their offices for you to ask. Presentations are made in class. All your friends are talking about it. But when you’re on your own, and removed from these networks, it’s a lot harder. You’ve got to make someone care about your situation.

What I did, once I knew I wanted to attend U of T, was simply pick up the phone and call admissions. It’s been a long time, so I can’t remember exactly how things went from there, but after talking to several people I eventually got someone from Woodsworth College on the phone. That’s U of T’s part-time college. And I admit, I was having a hard time sorting out my options and the systems I would have to deal with. So I made an appointment to see her personally. Once I was in her office, things just came together much more easily. University bureaucracies are made to deal with typical students. When that isn’t you, you’ve got to force the issue and make someone see you as an individual. Get a name. Make an appointment. If nothing else, make sure that the next time you call you can deal with the same person, who knows something about your situation.

Is education a right or an investment? The debate continues here

Firstly, I apologize for not getting involved in the comments last time around. Blog posting involves a responsibility to engage in the resultant debate, but jumping into the pond would have been much too haphazard, particularly given that I wasn’t expecting that volume of response and got to it late. So I’m going to try and address some of the points I feel aren’t being fully understood while trying to cover a lot of ground with respect to how economists typically think about educational issues. There are responses to some of the previous comments at the end of this post.
The decision to attend any postsecondary institution revolves around a basic choice: preferences over potential lifetime income streams. The idea, for most, is that by sacrificing a bunch of weekends and the chance to earn a salary for a few years to read textbooks and write exams, we can emerge from university with expanded labour market opportunities. There are very, very few people who can be credibly told that regardless of whether they attend university or not, they’ll never earn more than minimum wage – and who still choose university. Similarly, there are not many people who’d pay the full costs of university simply for the pleasure of it.

Since different people have different abilities and different feelings toward being stuck in lecture halls for years on end, not everyone makes the same decision to attend university or not. It’s entirely possible the story could end there. The oldest university still operating today was founded as a private charitable religious endeavor. Yet in most countries throughout the world, government has decided to intervene and distort the incentives facing those people making the choice whether to invest in PSE.

Why? Most economists (if they had no idea what university education consisted of) would first ask whether PSE is a public good, i.e. something that can only be realistically provided by government. The leading example is national defense – it’s very hard to imagine all Canadians teaming up to collect the money and fund a military force without some sort of a central body to oversee things. Public goods are characterized by being (a) unexcludable and (b) nonrivalrous. If I’m scared of the Americans invading and I buy a military to defend the country, I can’t decide to not provide military protection to my neighbour; I cannot exclude him. It is nonrival because we can both consume it simultaneously, unlike a hamburger.

However, education is certainly excludable – the professor can close the door – and at least somewhat rival. Lecture seats cannot be filled by an infinite number of people. Instructors do not have infinite time. Lab space in the hard sciences. The straightforward case is therefore very weak for direct public provision of educational services, so it’s incumbent on us to start being cautious about whether the government has a legitimate role.

Let me throw out some reasons from economics textbooks why governments might get involved. Democratic values rely upon an educated populace. Citizens could be boundedly rational or misinformed about the impact of education. Private markets could be flawed and unwilling to extend loans to those wanting to borrow against their future high income to attend university – this is the consumption smoothing argument I advanced the other day. People who earn more will remit more taxes. (For the record, each year of PSE confers about a 5% annual wage premia and an 8% total return, though that’s only one estimate, there remains much uncertainty about the true numbers; there are some tricky statistical issues.) Providing a home for academics to work might result in favourable conditions for other enterprises – this happens a lot in biosciences. Etc.

Since most of us can probably agree these are good things, not as many people will attend university as is socially optimal without government intervention. For example, suppose the benefits to me of getting a degree are $150,000, with an additional $25,000 in benefits to society, for some combination of the reasons listed above. (Just because these numbers are in dollars doesn’t mean they only include monetary benefits. If the student receives pleasure from learning, it’s included in the benefits. This way, I don’t have to introduce utils. Any cost-benefit study will monetize nonmonetary benefits in this way.) If the degree costs me $160,000 (including things like the income I choose to forego by working less), then I won’t attend. But if the government gave me $15,000 to attend university, then I would be better off by $5,000, and society would be better off by $10,000. Actually, more like $8,000 – raising $1.00 in taxes costs about $1.20 in wealth – at least, that’s the figure I used in cost-benefit class – in what is called the marginal excess burden of taxation. But the important point is that there’s scope for win-win here.

The problem arises in that the government is not all-knowing. If I value the degree at $200,000, then the $15,000 from government is free money in my pocket and a waste of resources in generating the funds and transferring them to me. Bigger problems arise as the subsidy increases, say with the same costs and societal benefits as before, but with the government subsidizing the cost down to $50,000. Then someone who only values the education at $60,000 could enroll, be personally better off by $10,000, but cost everyone else collectively $65,000 (or $87,000, counting that 20%)! But clearly it’s impossible to get everyone (anyone?) to accurately state their valuation of the degree before they even start classes. It’s equally impossible to accurately measure the benefits to society from one more person having letters after their name.

This brings us to student loans. Since large subsidies have the potential to generate these losses, which economists would term “deadweight losses,” other methods of reaping the ‘positive externalities’ of education might be worthwhile. Credit markets are imperfect, as illustrated over the last year. If the majority of the benefits of education accrue to the individual, rather than society, then student loans become a very effective tool for achieving the win-win described above: if I value my degree at $300,000, it costs $150,000, but I cannot raise the money as an 18-year-old, the government can step in with a loan to cover the discrepancy, enhance my welfare by the $150,000 and grant society the $25,000 in externalities. Even better, by placing the choice of whether to accept the loan or not on the student, the government implicitly learns the worth they place on their education, thereby significantly reducing the chance of spending a lot of money on someone who doesn’t value the service.

Intentionally or not, the combination of subsidies and student loans both serve different purposes: to tip people over the edge and rake in the social benefits, and to fix credit markets, respectively. Whether you think subsidies should be larger or smaller depends on your assessment of the magnitude of the externalities, but the dominance of student loans over grants/subsidies/etc. makes much more sense from an efficiency criterion. Both, yes, but loans should be first. Given that many Canadians have willingly – willingly! – shouldered billions in student debt, I cannot say that the government offering this choice has proved anything but a benefit to most (obviously, university provides no future earnings guarantees, some do lose out on this lottery, see my response to Joey below). If student debt was such a horrible thing, people would avoid it accordingly. Conclusion, as before: student loan debt is a good thing.

I’m not saying students are better off because they have to pay tuition. But if we decided to implement free tuition, that would basically be making a large transfer of funds from society to (a) students and (b) an incinerator – unless you think that someone else attending university is worth hundreds of thousands of dollars to the rest of society, above and beyond what the individual earns from their degree. I don’t think the numbers add up that high and cannot find any references that would support such a magnitude of externalities.

Beyond this framework, most points raised about how much the individual should be expected to pay are not economics but religion. “Social justice”, “equality of opportunity”, and so forth are termed normative statements. These arguments are ultimately subjective judgments about how an individual believes society should operate, and as such are removed from the microscope of scientific analysis, which is only equipped to discuss how society does operate. Some people may be willing to sacrifice large amounts of resources to ensure that tuition is free to all comers, which is fine in the context of one’s moral viewpoint. All economics can do is compute the likely effects. Now, I’ll try to address some of the specific points raised in the comments.

Joey: I agree in that nobody – or at least very few people – want(s) to default. Maybe, maybe there are one or two people who attend university and plan a personal bankruptcy the week they get out the door. Student loan debt is difficult to erase from the books, harms the credit rating and so on. I agree. There is a fine line between being too harsh on those who didn’t realize dreams through university – particularly since the government subsidies prodded them into taking the risk in the first place – and being too generous and opening the door to large-scale losses. Without the numbers, it’s difficult to judge. As Bob Whitney points out two comments down, there’s no guarantees here, but there’s no coercion, either. University is a risk that people take willingly.

Dale: I’m not presenting a single argument that cannot be found in an introductory microeconomics textbook anywhere in the country. I have probably moderated my points here a little bit relative to last time, but I don’t think anything fundamental has changed. It is ideological only in the sense that evolution is ideological: what I’ve said above enjoys virtually as strong a consensus among economists as evolution does among biologists, except none of us are sure of the numbers and thus have accordingly different responses. As I said, an individual may have moral judgments as to what policies should be pursued – economists like to maximize net benefits – but if one does not accept that social goal, then we enter a philosophical sphere. With respect to your first citation, it is misleading. Here is chapter 7 of the first reference, for example. Every nonmonetary benefit they quote accrues to the individual, not society, so free tuition is not justified no matter how large the nonmonetary benefit is. In fact, if the benefits were only monetary and nonmonetary – but both reaped by the individual – there would be zero case for government. The only way to justify free tuition is the belief that benefits accruing to the rest of society, not the individual, are larger than the costs of education, which I find very difficult to argue and cannot find any evidence to support. I seriously doubt you’ve read any part of either book.

Jeff: I do believe that people who are paying $10,000 to sneak across from Mexico to the U.S. illegally are doing it because it’s a good deal. For them. It may not be good in our eyes – anyone reading this article probably has better options than cramped factory hours at sub-minimum wage, but they wouldn’t do it if they had better options. Or do they just like to torture themselves? Similarly, sweatshops are a dream in some places. Certainly, the career and lifestyle that many Canadians desire are probably only obtainable from university education, barring exceptional cases. But we can’t promise everyone a good job just because they want it. I would still like an explanation for why people shoulder student loan debt if it’s against their best interests. Are they simply stupid? No. They’re taking a calculated risk to improve their lives. They expect that they will be better off with the loan and the degree than without either. On average, thanks to the student loan, they become better off. The government does not force anyone into student loans. As I said previously, how can “no university” be better than the choice between “no university” and “university plus loan”?

jessica: I agree entirely, you’re right, that’s a problem. Assuming that all parents are willing to fork out for their kids education is inaccurate. The education is an investment for the individual, not their parents, and should be calibrated as such. The intent of such legislation is to prevent rich families from using the student loan money – which comes at low, low interest rates – to buy a summer home or play the stock market with, but that doesn’t mean it’s blameless. Once anyone can vote, they should be free to conduct any financial arrangement without the status of their parents being factored in.

Chris: In my eyes, there is a difference. A graduated income tax has nothing to do with education. It is purely an issue of income equality. I think a progressive income tax is a good thing. But it’s got nothing to do with education. Why is paying back a student debt after graduation worse than paying an equivalent amount of higher taxes after graduation? The only difference I see is the former reflects how the individual gets most of the benefits of education and takes responsibility for that, while the tax and transfer invokes all sorts of bad incentives that I’ve talked about at length.

Josh: I cannot find “poverty” in my article, so I can’t respond there. But unequivocally, raising taxes reduces the incentive to work. Repudiating that is equivalent to a book-burning of every economics text on the planet. Like I said, education isn’t free, someone has to pay for it. Again, consider the extreme case: 100% tax rate. Why would anyone bother working? Number of professors = number of universities = 0.

patrick: ‘Default’ does not mean that the student still owes money. I am unsure where you got that impression, but you have it completely wrong. To quote, page three, last paragraph: “default (loans that are deemed uncollectible and lost)”.

Finally, I think it’s also important to note that anyone reading this, by virtue of visiting the oncampus site, is considerably more tied up in academic life than most. Whether a professor or a debt-ridden student, priors on these issues, mine included, are probably biased from the national mean, which is why I think it’s necessary to be objective, rather than advance policies that ‘would be nice’ or ‘sound good’.

Addendum: Fiscal policy, since it’s a hot topic. Whether you believe fiscal policy is effective or not is not the point. The idea is that the government can spend today in order to raise the aggregate demand for goods and services in the economy, which requires employment to produce those goods, etc. From first principles, direct spending is more effective than tax cuts: the idea is to get more money into the economy, so spending a dollar certainly does more than handing someone a dollar (say through tax cuts) and letting them decide how much to save and spend. Conversely, forgiving student loan debt is starting off by dedicating all the money to savings, so you have to count on the second-order effect of the individual to spend out of the payments they would have otherwise made on their debt, so it gets the least money moving of all per dollar of government spending. I won’t make claims about consensus here, because right not the profession doesn’t have any real consensus about whether fiscal policy is a sound idea; though probably the majority are in favour, there is certainly not a hint of agreement on what the proper spending targets could be.

Anyway, there. Way too much text, but I wanted to be as clear as possible. I’ll respond to comments in the morning and at least a few times after that, between bouts of tackling a problem set.

Figure doesn’t include about $5 billion in provincial or personal debt

Federation of Students news release:

Canada Student Loan debt will surpass the $13 billion mark today for the first time in the nation’s history. Total student loans owed to the Government of Canada increases by $1.2 million a day. The $13 billion figure does not include approximately $5 billion in provincial student loan debt or personal debt such as credit cards, lines of credits, bank loans, and family loans. This school year alone, almost 360,000 students required loans from the federal government.