All Posts Tagged With: "Student Loans"

If you’re staggering under student debt, bankruptcy might not be the best way out

According to a recent article in the The Toronto Star, the federal government’s Bankruptcy and Insolvency act makes it pretty difficult to dodge student loans through bankruptcy.

If you really want to declare bankruptcy, business writer James Daw says you’d better have a good excuse for not paying, “even after the five to seven years… that the legislation allows for such debts to be wiped clear.” Students must allow show that they tried in “good faith” to repay the loans and are now absolutely unable to pay.

After one 29-year-old medical student suffered a traumatic brain injury while cycling in Vietnam after graduation, she still owed Royal Bank $134,000, which was partially to cover her student loans. She was granted a discharge of those debts, and is now living on social assistance.

But, according to The Star, not everyone who asks for bankruptcy will qualify.

One Mississauga woman raised a 16-year-old son on her own until he decided to move in with his father. Although she currently makes about $53,000 a year, she declared bankruptcy in 2000 when she owed student loans totalling $21,000.

According to the bankruptcy registar, the woman made a few questionable decisions, which included selling her 12-year-old car and leasing a new Volkswagen to commute from Mississauga to her downtown Toronto job and to visit her son in Ottawa. She also provided her son with a cellphone.

Most Canadians would find it troubling that she wanted to be free of loans for the education that helped her find her job and qualify for a public sector pension, said the registrar. “There is no good reason why repayment of the loans for those studies ought not be made, over a lengthy period of time, perhaps even… her working life.”

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.

They can be a wise investment. Discover how to get the most out of them.

If you’re a first-year Canadian college or university student, you’re probably not old enough to buy a drink. If you’re under 18, you can’t vote. You can’t get your own credit card. But as early as age 16, you can sign your name to a contract that offers thousands of dollars up front, and, if you read the fine print, promises years’ and even decades’ worth of financial obligations after graduation. It’s called a student loan. Forty per cent of full-time post-secondary students receive government student loans each year. Many don’t understand what they’re getting into—or how, if they’re not careful, they can end up with crippling, life-altering debts.

See also: Student Finance 101

Scholarship Finder

Calculate the cost of university

Here’s the big picture: according to the most recent data, 350,000 students borrowed an average of $5,631 in federal loans during the 2005-2006 academic year, a jump of 17 per cent from the year before. The average newly minted bachelor’s degree-holder graduates with over $20,000 in government student loan debt, which will take her 9½ years to pay off.

For many students, attending college or university wouldn’t be possible without student loans. The Canada Student Loan Program (CSLP) offers funding to students whose expenses exceed their resources. In most provinces, when you apply for a CSLP loan, you’ll also automatically be applying for a provincial loan. There are limits on how much you can receive and under what conditions—and the system is designed to supplement your own finances, not cover the entire cost of your education.

The maximum annual amount you can receive varies by province, institution and program; the lifetime maximum limits student loan funding to 340 weeks of study up to $50,000 unless you are a doctoral student or have a permanent disability. In most cases, you will be eligible for a maximum of 60 per cent of what is called your “assessed need” from the Canada Student Loan Program; you may also be eligible for additional funds in provincial loans. To determine your assessed need the CSLP calculates the cost of your tuition, books, housing, food, and other expenses and then subtracts your resources, including savings, assets, part-time work income, parental income, and awards. You can estimate your assessed need with the online calculator at canlearn.ca.

If you’re expecting a loan, have a backup plan. Many students get a nasty surprise when they discover that they won’t be receiving as much funding as they’d hoped for. This can happen for a variety of reasons. For instance, whether or not your parents are helping to support you, parental income matters when applying during the first four years of study. Some students get caught in the middle-class gap: their parents don’t earn enough to help pay for school, but they do earn enough to reduce the size of CSLP loan.

Depending on your financial situation, you may want to consider other forms of debt. Many students get both government loans and a student line of credit from a bank. Lines of credit (LOC) are more flexible than student loans since you can borrow only what you need, when you need it. If your parents co-sign the LOC (which they will likely be required to do), the interest rate on an LOC may be lower than on your student loan.

Promise made in middle of election campaign

If elected, the Alberta Progressive Conservative Party will cut student loan interest. The party unveiled its post-secondary education platform Monday to a lack of fanfare.

Alberta Premier Ed Stelmach, standing in front of 200 Tory supporters Monday, also promised to limit annual tuition increases to the rate of inflation But he got no applause from the partisan crowd.

Compared to the Alberta Liberal’s plan to cut tuition by $1,000 if elected to government, Stelmach’s tuition plan is fairly modest.

Stelmach’s government also pledged to slash student loan interest rates by 2.5 per cent, bring it in line with the prime lending rate. The Liberals have echoed this promise.

Opinion polls show Stelmach’s Progressive Conservative Party enjoying over 50 per cent voter support and the party is expected to easily win re-election.

Julian Benedict, co-founder of the Coalition for Student Loan Fairness, applauded the act. “The move shows a greater emphasis on the needs of student loan borrowers and reflects a genuine shift to improve programs for borrowers across the country,” he said.

Nova Scotia recently lowered their interest rate to the governments cost of borrowing for low-income graduates. This amount varies but is generally 1 per cent below prime.

These policy changes only effect the provincial portion of student loans. The majority of borrowers’ student loans are federal student loans. Federal loans continue to charge 2.5 per cent above prime.

Federal Human Resources Minister Monte Solberg has hinted that the federal rate is under review. He has promised policy changes to the Canada Student Loan Program in the 2008 federal budget to be announced February 26.

Benedict is optimistic about the upcoming federal budget. “We’re hoping that the government will come through with an ombudsperson office, significant interest rate cuts, and better interest relief and debt reduction programs.”

British Columbia’s 2008 budget, announced February 19, did not include any student loan interest relief. The floating interest rate for British Columbia student loans remains at 2.5 per cent above prime while the fixed rate is 5 per cent above prime.