All Posts Tagged With: "grants"

Why Canadian students graduate with more debt, not less

Too much debt? Photo by Zach Klein on Flickr.

Canadians are graduating with more debt than their American counterparts—despite the well-known higher sticker prices south of the border.

In the U.S., average debt at graduation rose to $25,250 in 2010, according to a Nov. 3 report by the Project on Student Debt. Here in Canada, students were graduating with an average debt of $26,680 according to a 2009 report released by the Millennium Scholarship Foundation. If anything, the Canadian average is higher now.

The numbers seem almost impossible: isn’t tuition ridiculously high in the U.S.?

Continue reading Is the U.S. tuition system more progressive?

Closing the higher education gap is more complicated than making sure everyone can afford it

A study of university graduate rates in Quebec suggests that while needs-based grants improve university attendance, they don’t help university graduation numbers. In other words, Quebec’s additional needs-based grants did allow more lower-income students to go to university, but that increase did not mean that more of those students actually graduated.

This study raises at least two questions in my mind. First, if a student goes to university and does not graduate, has that student necessarily wasted the time and money spent? The study’s author, Mathieu Chemin, seems to think so, pointing out that the labour market rewards graduation, not attendance. But labour markets are not the only measure of the value of education. I would like to see data regarding how many students who attended university without graduating still view their time there as rewarding and valuable. A half-eaten meal is still nourishing; it may be all you need. Might there not be many who attend university for, say, two years, and then decide to move on to other things, but do so with a wider range of knowledge, a better set of critical skills, and a fuller sense of the world’s possibilities? I have known more than one student who fits this description perfectly.

But even if many students do end up wasting their time pursuing a degree they don’t finish, another question arises: Why don’t more of those low-income students end up graduating? The possible answers that suggest themselves to me relate to preparedness. For one thing, low-income students may live in areas with inadequate educational resources. If their schools, libraries, and museums are inferior (or absent), poorer students may not be as well-prepared for university study. Similarly, if parents are struggling to make ends meet and working long hours at exhausting jobs, they may be unable to take as active an interest in their kids’ learning (directly or by hiring tutors, say) as richer parents. Still further, low-income parents may themselves not have been to university and, as such, may (consciously or unconsciously) teach their kids to undervalue higher education, which might make their kids less likely to stick with it even when they do go to university themselves.

In short, lower-income kids may be less prepared and less enthusiastic about university in the first place, leading them to drop out before finishing. A 2007 Statistics Canada study concluded something similar about university attendance in general: that poorer students don’t attend university as often, but not because of money per se, but because of lower academic performance and differing parental expectations. If this is true, though, it doesn’t mean there is no problem. Instead, it may mean that we need to concentrate less on grants to lower-income students and look more closely at public education to see if it can play a greater role in letting disadvantaged kids know that university is an option, and getting them ready to realize that choice.

Under Schwarzenegger’s new plan, 77,000 grants totalling $180 million would be cut

The L.A. Times is reporting that California’s financial assistance program, which gives cash grants to low and middle-income university students, could be on the chopping block as the state faces a skyrocketing deficit.

The plan emerged in testimony by the state’s administration at a hearing today following Gov. Arnold Schwarzenegger’s  turnaround on a week-old plan to borrow $5.5 billion to help balance the state’s budget.  One nonpartisan analyst estimates the deficit at around $24 billion (USD).

Under the new proposal, 77,000 new grants costing $180 each year would be cut, but savings would eventually grow as high as $900 million as students graduate and the grants are phased out entirely.

Other programs at risk include the state’s main welfare program and health insurance for low-income families.

Newfoundland and Labrador eliminates interest on the provincial portion of student loans

The government of Newfoundland and Labrador has released its 2009 Budget. The budget, which has a $750 million deficit, makes a number of changes to student financial assistance that, according to the minister of education, provide for the “best student aid package in the country”. Spending initiatives that will impact the student pocketbook include:

• a continuation of the tuition fee freeze at Memorial University of Newfoundland and the College of the North Atlantic;
• an increase in up-front, non-repayable, needs-based grants from $70 to $80 per week of study; and
• the elimination of interest on the provincial portion of student loans.

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.

Billions owed to the government proves many people benefit from student loans

The Internet was flooded today with reports that Canadians collectively owe billions and billions of dollars to the federal government, borrowed to finance postsecondary studies. Seriously, this is a good thing. A few reasons? Sure.

1. It shows that students believe that they will be able to find good jobs in the future. Let’s face it, most people aren’t struggling into 8 a.m. introductory calculus for the sheer joy of it, but because they need it to get their degree, which they hope will in turn pay off later in life with higher wages. If students are willing to borrow a lot today, that means they collectively believe that their income tomorrow will be even higher. The odds of the collective being wrong are always low.

2. Choice is a good thing. Suppose you have just graduated from high school in two different versions of Canada. In one, your only option is to enter the workforce or fund your education yourself. In the second, our version, you have an extra choice: enter the workforce, pay your own way, or get a good deal on a government loan. Nobody is coercing people to get student loans. In fact, the only rational reason to get a student loan is because it’s a better alternative than anything else. The fact that the program is so heavily subscribed only indicates the government has been very successful at providing people better alternatives than anything else they can find.

3. Consumption smoothing is a good thing. Suppose you are faced with two choices: Live off $50,000 every year of your life, or live off $90,000 for half the years and $10,000 for the other half. There are no savings instruments. Most people would take the constant income. The student loan program allows people to smooth their consumption over the life-cycle where banks fear to tread, consuming more as a poor student and less as a productive member of society.

Neither of these points have addressed what is implicitly being called for in many of these articles, namely to give students even more money to attend university. This is a question economists are ill-equipped to directly judge, since it is mostly a moral one. Is it correct to forcibly take money from the rest of society via taxes and give it to students? I will leave that to philosophers, but I can say some other things.

4. Over a quarter of student loans in Canada fall into default, i.e. are not fully repaid. So effectively we are giving lots of people grants under the current structure anyway.

5. Government transfers have bad incentives. When the government raises tax rates, it reduces the incentive for people to go out and earn more money – if the tax rate was 100 percent, how much would you work? How much would you thus pay in taxes to fund the educational system? Higher taxes make us collectively poorer as a whole, so if you want to use taxes to fund public projects, you should be sure it is worth it.

6. No-strings-attached grants have bad incentives. If the government decided to fully pay for all costs of education – in the extreme case, living expenses as well – I would not be surprised if I chose to remain a university student for life. Unfortunately, there’s a real cost to hiring professors and maintaining universities, and someone has to pay for it. I’ve also had professors argue that higher tuition fees keep poor students out and thus enhance the academic experience for the dedicated students. I am personally just shy of willing to go there.

How I put myself through school by writing to two of the richest men in Canada

In September 2005, I left Toronto for grad school in Berkeley. In my bags, along with a copy of Joan Didion’s Slouching Towards Bethlehem and several pairs of regulation California flip-flops, I had two cheques totalling $26,000. The cheques were from Canadian millionaires I’d never met. They’d promised to send me money to pay for grad school, provided I write to them once a month. They also asked me to keep the arrangement confidential.

I kept half of my promise.

What follows is the story of how one girl (me) put herself through school by writing to two of the richest men in Canada.
April 2005. I was at my friend Rachel’s house, sitting at her kitchen table with Shuah, her lovely bespectacled friend. It was a spring day in Toronto.

I needed money. Not for an abortion or a car or anything ghastly like that. I’d just applied to one of America’s most expensive graduate schools and had gotten in. They were offering me $5,000 in scholarships, which would cover the cost of coffee and sunscreen for a few months. I needed more, and I needed it fast.

“Who has money?” I asked, into the air.

Rachel and Shuah looked at me. “Rich people have money,” Rachel said.

We didn’t have any money, that was for sure. Rachel was dating a soft-hearted grad student from a poor town in the Maritimes and Shuah was law-school-thousands-of-dollars-in-debt-poor. Me, I was still paying off student loans from my undergrad years at McGill.

My mother worked a government job at an arts agency, and though she would have given me her last cent even if it meant she’d have to live in a tent across the street, she couldn’t spare much. I needed $40,000 at least. My dad was a full-time writer. He’s also pretty successful, but he’d just gotten married and bought a house and I knew every cent was headed in that direction. I needed to widen my contacts. I needed rich people.

“Okay, so how do I get money from them,” I said.

We mulled it over.

“I suppose you could just ask them,” said Rachel.

A scheme started to take shape. I knew I could write a funny letter if I needed to. I also knew from reading magazine profiles of millionaires and from watching Annie that rich people were often eccentric. I did some creative visualization, Shakti Gawain style: I pictured a big man sitting in a chair, reading my letter, and reaching for his chequebook. I pictured him calling out to his secretary: “Put this in the mail, Gladys. This girl’s got spunk.”

Is giving more students less money really a success?

Many groups in the know are applauding (some more cautiously than others) yesterday’s announcement to replace the Millennium Scholarship Foundation with a government-run grant program. But many questions remain and the changes will lead to some casualties that have been overlooked so far.

As previously reported, Finance Minister Jim Flaherty confirmed the death sentence that has been hanging over the head of the Millennium Scholarship Foundation (MSF) when unveiling plans for a new grant system in the 2008 budget. The MSF’s $350 million annual budget along with the $138 million currently distributed through Canada Access and Study Grants will be rolled together into one big national grant program to be administered by the Canada Student Loan Program.

Although the Liberals are painting the move as a simple rebranding, the end of MSF will certainly change the landscape of student financial aid in Canada—if not only for the seemingly positive changes (the transparency of being a government program) but also for the smaller functions of the Foundation that have been quietly left out.

The Canadian Alliance of Student Associations (the Canadian Federation of Students’ rival) was quick to point out that the Foundation was not only about delivering grants, but also about research. “The Foundation was the only group that was doing research on access issues. Looking at Aboriginal students, low income students, and first generation students,” said Zack Churchill, CASA national director. “We haven’t seen any indication from the government that the federal research will be picked up.”

And while Churchill’s critics might argue that we have, say, StatsCan for post-secondary research, the Foundation’s unique approach to research will surely be missed.

Alex Usher, vice president and director (Canada) of the Educational Policy Institute, said that the government program will likely focus only on financial aid research. “There will nobody speaking for access anymore in terms of research,” he said.

Another Foundation program that was not mentioned in the budget was its merit-based scholarships. MSF awarded $12.6 million in scholarships annually. The scholarships were unique in that they took community involvement into account as well as marks.

Franca Gucciardi, executive director of the Canadian Merit Scholarship Foundation, said that this program was very important in terms of supporting talent and leadership. “As Canadians, we’re good at need, but not as good at merit,” she said.

Although the budget included a new and prestigious merit-based scholarship program for doctoral students, it doesn’t replace merit-based support for undergraduate students. “You don’t get to do your PhD unless someone supports you to do your bachelors,” Gucciardi said.

Although the Educational Policy Institute said the changes were largely a good news story, it found a couple of major holes in the proposed program. The potentially costliest problem is whether independent students are eligible for the grants. As it stands, it appears that independent students (those out of high school for long enough that they are not required to include their parent’s income when applying for grants and loans) will be able to apply.

Because the grants will be based on family income rather than need (costs minus resources), almost every independent student who applies will be eligible because their income will fall below the line. There may be as many as 500,000 independent students currently enrolled in Canada. But the budget for the new grant program only aims to provide funding to 240,000 students. Whoops! This could make the program cost well over $1 billion.

Usher also pointed out that at least two Canada Study Grants seem to be missing from the mix: funding for students with dependents, and female doctoral students. From the Educational Policy Institute’s discussions with Canada Student Loan officials so far, it appears that the $70 million in grants for students with dependents has been rolled into the new grant money. Officials did confirm that grants for students with disabilities will continue to be awarded.

One thing that everyone seems to agree on is that basing the grants on income instead of need is a positive step. The Foundation’s grants were awarded according to the amount of money needed for the student’s educational program minus the student’s resources. Basically, if two students had exactly the same family income, but one chose to go to an expensive university and move away from home and the other chose to attend their community college and live with their parents, the first student would receive more grant money. It meant that students were being rewarded for making more expensive choices.

The new system will not take into consideration the costs of education, but only the family income of the student. The indirect result will be that more money will flow to college students in comparison to university students.

So although student groups can breathe a sigh of relief that the existing money going into grants in Canada won’t be axed along with the Canadian Millennium Scholarship Foundation, they should probably crunch the numbers before declaring victory (as the CFS did oh so quickly). MSF distributed an average of $2000 to 120,000 students each year. The new program plans to hand out grants to 245,000 students next year, but with no new money. So the individual student recipients will be getting less cash. Victory?