Higher Education Strategy Associates

Category Archives: student aid

March 19

The Canadian Way of Higher Education Subsidies

One of the biggest arguments in student assistance is about who to subsidize and why.  Unfortunately, because we are rarely explicit in the way we talk about subsidies, discussions tend to be a dialogue of the deaf.

One school of thought says we should subsidize students based on their parental income.  Students from poor families need more help to succeed than students from wealthier families, and so the former should pay less, and so we should pay them grants to reduce the net cost of attendance.  Then there’s a second school of thought, which says that the way to focus subsidies is to focus on needy graduates.  Forget the upfront subsidies: the people we need to support are the ones who don’t do well out of their education, and as a result remain low-income for years.   The third school of thought holds that everybody should receive the same subsidy no matter what their parents make, or what they make afterwards.  And then there’s a final school of thought, which says we should reward “good behaviour”, however defined.

Other countries are pretty explicit about their choices.  The Americans go pretty heavy on the parental income track (though the beneficial effects of this are counteracted by other funding and policy choices).  The UK is quite explicit about using the graduate income track as a means of subsidy: everybody borrows oodles of money to pay expensive tuition fees, and the ones who make out worse get these loans forgiven (eventually).  Much of Europe – especially Scandinavia – operates under the third school of thought, even at the price (in a few countries) of having an unnecessarily badly-funded system as a result.  The fourth view is surprisingly widely-held around the world, as it applies to anywhere that has a dual-track system of higher education (most of the ex-socialist countries of Europe, much of Latin American and Anglophone Africa) where “meritorious” students get first crack at the subsidies.

In Canada, we have a mish-mash of strategies, partly because we’re a federal system, so coherence is always a problem, and partly because we have a real tendency to reach for solutions before fully articulating the problem.  Our student aid system mostly works on the parental system, but allows students to declare independence relatively early (in practice, age 22), which effectively moves to the universal system.  We have a relatively generous Repayment Assistance Program (RAP), which uses the needy graduates approach.  And  though we aren’t especially heavy on merit awards, our $700M/year Canada Education Savings Grant, which rewards savers, is just a variant on the “reward good behaviour” approach.

You see, Canada just doesn’t do joined-up coordinated approaches; rather, we tend to just reach for whatever looks shiny, and implement it.  The result is a system that spends wildly in all directions, with nothing resembling an underlying philosophy.  Each individual program is arguably successful on its own terms, but the result is a system tha is arguably less successful than it could be if we focused spending on one or two of these pathways.

March 18

How ICRs can Become Graduate Taxes: The Case of England

As noted yesterday, graduate taxes and income-contingent loans have many similar features.  They both defer payments until after graduation, and they are usually payable as a percentage of marginal income above a given threshold.  In England right now, the payment scheme on ICR loans is that students pay 9% of whatever income they earn over £21,000 (roughly C$38,000).  The difference between the two is that with a loan you have a set amount to pay, and when it’s paid you’re finished.  With a graduate tax there is no principal, so you just keeping paying that fraction of your income for as long as the tax lasts.

That sounds like a simple and clear delineation, right?  Well, here’s a twist: what if the loan were so big that you had no practical chance of ever paying it off at the set repayment rate?  What would the difference between an ICR and a grad tax be then?  The answer is: practically nothing – and that’s exactly where England finds itself right now.

Let’s step back a bit: in 2010, the UK government decided to let institutions charge tuition up to £9000.  They also decided to allow students to borrow this amount for tuition (plus more, again, for living expenses) under the repayment scheme described above.  When they did this, they were under the misapprehension that universities might actually try to compete for students on price, and hence assumed an average tuition of about £7000.  Rather predictably, average tuition shot straight to £8500.  As a result, it’s quite common for students to be borrowing £12-13,000 per year, or £36-39,000 for a degree (that’s C$66-72,000 – yes, really).

Crazy, right?  Cue all the “intolerable debt burden” stuff.  But wait: these loans aren’t like the ones we’re used to.  Repayment is based on your income rather than size of debt – no graduate is ever required to pay more than 9% of their income over £21,000 in any given year, so the burden in any given year is pretty limited.  And – here’s the kicker – the loan gets forgiven after 30 years.  So, if you don’t finish paying, your obligation disappears without you having any debt overhang. Exactly like a Graduate Tax.

How many won’t pay it off?  Well, these things are difficult to predict, but even over 30 years, paying 9% of your income over $38,000 isn’t likely to completely pay off very many of these loans.  The government’s own financial forecasts are that 35-40% of the total net present value of the loans will have to be forgiven (others put it 8-10% higher).  At a rough estimate, that probably means 70 to 80% of all borrowers will see some loan forgiveness.

At this point you start to wonder if debt numbers really matter in this system.  Forget ICR: for most people, the current system is simply one in which government transfers billions of pounds in 2014 to institutions using student loans as a kind of voucher system, then turns a portion of those loans into student grants in 2044 via loan forgiveness.  In the meantime, graduates pay a 9% surtax on income over £21,000.

Altogether, a very wacky system.  Not a model for anyone, really.

March 17

Oregon’s “Pay It Forward” Scheme and the ICR vs. Graduate Tax Problem

You may have heard some rumblings from south of the border over the past few months with respect to a program called Pay It Forward (PIF).  The brainchild of a student group called Students for Educational Debt Reform, this idea was picked up by the Oregon assembly last summer; within a few months, over a dozen state governments were examining similar draft legislation.

The basics of the program are these: instead of paying tuition, students agree to pay a percentage of their future income (the percentages vary by state – in Oregon it’s 0.75% per year of study) for 20 years after graduation.  Some people mistook this for a version of income-contingent loans because it emphasized paying for school after-the-fact rather than up-front, and also because repayments were to be made as a function of income.  But there’s one key difference.  Loans have a limited liability: once you pay off the principal and interest, you’re done.  With PIF, there is no principal – once you start paying into a hypothecated fund, destined for the state’s higher education institutions, you keep on paying for 20 years no matter what.  This is formally known as a “graduate tax”.

Graduate taxes tend to be more progressive than income-contingent loans.  If you’re at the bottom of the income scale, you probably come out better off – you simply never pay anything.  If you’re at the top of the income scale, you’re likely going to pay a lot more because a portion of your income will go into public coffers long after you’d likely have paid off a loan.  Interestingly, the famous Yale Tuition Postponement Option of the early 1970s (designed by Nobellist James Tobin, and used by Bill Clinton when he attended law school there) went off the rails for precisely this reason – the richer students got tired of paying for the poorer ones, and started making a fuss.

One downside to a graduate tax is that it’s harder to collect than a loan.  In the US, for instance, it’s hard to imagine enforcing something like PIF, unless it was instituted nationally (if someone moved from Portland to Chicago, would Illinois be responsible for collecting the PIF contribution?).  A graduate tax was in fact examined relatively thoroughly not once but twice in England (the 1997 Dearing Report and the 2005 fee reform), and was rejected precisely because of concerns about grads evading repayment through emigration.

Another downside is: where exactly does the money come from while you’re waiting for graduates to start earning money?  If tuition is covering 40% of institutional expenditure, someone has to make that income good over the 20 or so years before the grad tax makes up the difference.  It’s not clear who that might be; if the state had money to do this, it probably wouldn’t be faffing around with ideas like PIF.  You could securitize the revenue stream, of course, but that also might get tricky.  Income-contingent loans lack graduate taxes’ most potentially progressive features, but they do have the advantage of: a) being collectable, and b) producing income for institutions in the short term.

There is of course one country that is trying very hard to merge the ideas of ICR and graduate taxes, with some really odd results.  More on the English experiment tomorrow.

February 20

Why Can’t We Just Means-Test Tuition?

A couple of weeks ago, I had an exchange with a colleague who couldn’t figure out why tuition wasn’t means-tested.  It just makes sense, he said: make the rich kids pay lots of tuition, and make the poor kids pay very little.

I argued that it was means-tested.  If you didn’t have means, you’d get a grant, which would reduce tuition (though I allowed that this was done a lot less effectively than it could be, given how poor our targeting system in student aid is).  ”OK”, he said, “but why not cut out the middle-man and just vary tuition directly according to a student’s parental income?”

Now, there’s something to be said for this.  Clarity, for starters.   As we noted yesterday, there are already tens of thousands of low-income students attending for free, and nobody seems to know it.  If we could just re-package aid and fees into a single, easily understood figure, that clarity might go a long way to improving access.

It’s also not unprecedented: in 1998, when tuition fees were introduced in the UK, the fees were made variable based on income.  Students from families making over £30,000 were charged £1,000; those from families making between £20,000 and £30,000 were charged £500, and those from families making less than £20,000 were not charged anything at all.  Similarly, in a couple of the German states that introduced tuition after 2006, waivers were instituted so that poorer students paid nothing at all.

There are basically two reasons why we don’t do this in Canada.  The simple, technical reason is that in most parts of Canada, universities are still notionally in charge of tuition and admission, and universities don’t ask students what their income is.  In the UK, government agencies outside the university were in charge of both, so it was easy enough to achieve.  For us to do that here would require taking away at lest some institutional autonomy and/or making sure that whoever makes the admission decision also knows a student’s family background.  Ontario’s provincial university application centre (OUAC) might be the kind of organization to do this, but elsewhere in Canada it would be more difficult, as each individual institution would have to tool up a separate income-assessment system.  Not impossible, by any means, but difficult.

But the bigger issue is simple raw politics.  If government grants were folded into a single tuition price, how could the federal government get credit for all its tax credits and Canada Study Grants?  How could Ontario get credit for its Utterly Inane 30% Tuition Rebate?  And, depending on how rigid you wanted to be about this one price rule, it might also prevent universities from using their student aid and scholarship budgets strategically.

In short, the barriers to simple, easy-to-understand means-tested tuition systems are less technical than political.  It’s a case of the need to be seen to do good trumping the need to actually do good.  Sad but true.

February 19

Free University and We Don’t Even Know It

I’ve long believed that post-secondary education should be free for bright, poor kids.  And although there’s room for differences over what constitutes “poor” and “bright” (I’ve got a strict-ish definition of the former, less so the latter), it seems to me that this is a sentiment with which most people agree.

But here’s the thing: in actual fact, there are an awful lot of bright poor kids already going to university for free, and nobody seems to notice.  The problem is that we just don’t package it in a way that people recognize it as being free.

Take Quebec.  What’s that?  Lowest fees in the country, but kids still have to pay?  Pshaw.  Over 100,000 university students there receive grants.  The median grant is $4,500.  Average tuition and fees is $2,000 or so.  A quick look at statistics from Quebec Aide Financiere Aux Etudes suggests that at least 40,000 students are receiving more money from government than they are paying to go to school.  Unless you’re deliberately trying to be obtuse about it, that makes 40,000 people getting a free university education.

Ah, you say.  But what about mean old Ontario, where tuition and fees are now up around $7,000.  Well, actually, there are a substantial number of students getting free education there, too.  Thanks to the Ontario Tuition Grant, full-time dependent students from families making under $160,000 (yes, the limit’s an utter travesty – we’ll discuss it another time) get $1,730/year from the government.  Those from families with income under $40,000, or so:  they’re eligible for another $1,600 from the Canada Student Grant.  Add in another $2,300 or so in education tax credits, and we’re up to $5,600.  If the student is doing well at school – say, high 80s – that can qualify them for another $1,500 or so in entrance awards.  That’s $7,100 in non-repayable government aid – more than what they are paying in tuition.

Or, another combination: Imagine the same student from a family earning roughly $60,000.  Probably wouldn’t get the Canada Study Grant, but would get everything else, meaning they’d be receiving about $5,500.  If they left home to go to school, the likelihood is that they’d get a loan in the $9,000-$10,000 range – of which anything over $7,140 would be forgiven (that is, turned into a grant).  So, again, free tuition.

I could go on province-by-province (Saskatchewan and Manitoba do pretty well in this kind of accounting), but I’ll spare you. There are no numbers that would allow us to say for sure how many people are receiving this kind of money.  For what it’s worth, my guess, based on my knowledge of student aid in Canada, is that the number is probably in the 100-150K range, but it’s hard to know for sure.

You’d think that this would be one of those things about which everyone – especially provincial governments – would be standing up and shouting to the rafters: it’s a heck of a good news story.  And yet, absurdly, nearly no one even knows its even happening.

How did this state of affairs come about?  More tomorrow.

February 18

The Canada Apprentice Loan

One of the signature pieces in last week’s budget was the Canada Apprentice Loan (CAL).  Very few details were given out at the time (see p. 70 in the budget, here), but what details did emerge suggest two things to me: first, that the idea went into the budget less-than-fully-baked; and second, that it could turn out to be a fairly significant political mess.

The proof of this being less-than-fully-baked is the lack of detail surrounding the idea.  While the scheme seems to be about putting money into apprentices’ hands during block training periods, it made no mention of how this loan would mesh with the significant amounts of EI money apprentices already receive during those periods (training periods are considered a period “out-of-work” under EI, so apprentices are eligible for EI during this time, and receive payments equivalent to 55% of their normal working income as a result).  Does it replace the EI money?  It seems unlikely that the Tories would try a bait-and-switch, but the silence about integration suggests the issue hasn’t been thoroughly thought through.

But if it’s additional, what’s the $4,000 for, exactly?  Living costs? That would put the amount available to them over 100% of their wage rates. If that happens, all hell will break loose on the Canada Student Loans front.  CSLP doesn’t work on a wage-replacement principle, it works on an allowance principle: that is, it assumes that the purpose of student loans is to top-up students to a particular maximum, based on living arrangements, presence of children, and local cost of living.  For a single student living away from home, that probably means about $1000/month.  But apprentices earning $16/hour in their job already receive about $1600/month in EI funding.  If you lend this better-off group more money, what possible excuse do you have to say no when student groups come asking for similar treatment for CSLP?

Another possibility is that the loans are specifically for training costs.  But then why make it $4,000?  A Canadian Apprenticeship Forum paper from 2007 (see: here) showed that average training costs – including tools and apprenticeship registration fees – were just $1300, and that 50% of apprentices paid less than $800.  Nothing’s changed significantly since then, so why the super-high maxima?  Again, setting maxima well above actual need is going to set off a clamour for similar treatment in the CSLP.

Here’s my take: the current federal government is very fond of apprenticeships.  But the problem is that most of the levers of apprenticeship policy are in the hands of the provinces.  The only thing the federal government can really do is pump money into apprentices’ hands in the hope that the extra funding will make more people want to be apprentices.  That’s probably about as deep as the thinking went on this file before it went into the budget.

It’s possible it will get better upon implementation (as the recent ruckus on income-splitting shows, at least some of the Tory cabinet seem able to re-evaluate policy in the face of evidence), but as it stands right now, the roll-out of the CAL could be more problematic than the federal government seems to think.

January 29

Why is Student Debt Not Increasing?

Yesterday, we discussed why student debt burdens were falling.  One of the key ingredients in that recipe was that student debt had remained stable, or even fallen, over the last decade or so.  This is a puzzling piece for many because it seems counterintuitive.  So what’s going on?

Well, costs are increasing, but only modestly so: since 2000, tuition has only been rising about 2% above inflation.  There’s been no real change in the percentage of students living away from home – and for those who do live away from home, the picture is mixed: students in Western Canada are paying a lot more than they did 10 years ago; students in Ontario, on the whole, tend to be paying less.  Nationally, it mostly evens out.  Given these changes in costs, one would expect modest but noticeable increases in borrowing, ceteris paribus.  So something else must have changed in order to offset this.  But what?

Is it a question of students themselves having more resources?  Probably not.  As Figure 1 shows, student employment is remarkably stable over time.   So, too, is their average hourly income from wages, which surveys show is almost always 20-30% above minimum wage.

Figure 1: Student Employment Patterns, Canada, 1997-8 to 2009-10












What about money from parents?  This seems to be up a little bit: average transfer in 2001-2 was about $2000 (in $2011), and is now about $2500.  What has changed, however, is the amount of money students get through RESPs.  This was negligible ten years ago; now, roughly 30% of students receive money from this source, and it’s a significant amount, too ($4,000/year, on average).  Obviously, much of that’s going to students who aren’t on student aid, but for those who are, it’s more than enough to explain the slowing rise in debt.

Then there’s the rise in student assistance.  Institutions have massively increased their scholarship budgets.  In the 1990s, about one in three new students got some kind of entrance scholarship.  Now it’s two in three.  The total amount spent on grants and remissions by provincial and federal governments jumped from $600 million/year in 1995, to almost $1.8 billion in 2010 (both figures in $2011 real dollars).  And of course, governments have added an extra $1.5 billion in tax credits.  Not all of that ends up in students’ pockets (some ends up with parents, some gets deferred until after graduation), but enough does to take a bite out of rising costs.

Figure 2: Increases in Total Government Student Assistance, Canada, 1993-94 to 2010-11 (in real $2011)














None of these, on its own, amounts to a silver bullet to explain why student debt is stable or falling.  But together, it’s easy to see: more grants, more tax credits, the creation of the RESP are, together, probably putting about $3 billion extra into students’ hands every year.  Call it about $3,000 per year, per student.  Then add institutional aid, and throw in the extra billion or so that has gone to grad student funding in the past fifteen years.  That brings us to about $4,000 extra, per student.  That’s more than enough to explain why debt isn’t increasing.

In fact, the real question may be: why hasn’t it decreased more?

December 03

Things We Take for Granted in Student Assistance

Last week, I had the pleasure of talking with federal and provincial student aid leaders, in Toronto, about global developments in student assistance.  I told them there were a lot of interesting developments in different places, but they weren’t necessarily applicable to Canada because of different national contexts.

Context matters in student assistance – not everything we have here is available to student aid types elsewhere.  Here, for instance, are just a few of the things we take for granted when we make student aid policy:

1)      A government rich and trustworthy enough to run a lending program.  Not everyone has enough cash-on-hand to lend directly.  And of those that try to get banks to participate via loan guarantees, not all are trustworthy enough to be able to make a credible guarantee (if you were a bank, what value would you put on a loan guarantee from, say, Vanuatu?).

2)      Accurate need assessment.  Loans are based on family income, but how do you assess need when no one trusts the data?  In Japan, for instance, a nation of small shopkeepers, they won’t create a grant program because, fundamentally, they don’t believe enough people are telling the truth on tax forms, which form the basis of the need assessment process. 

3)      Money shows up when government says it will.  When government here says money will be available in September and January, that’s when it shows up (individual SNAFUs aside).  But in much of Africa, government programs run hand-to-mouth.  If tax receipts are a little slow, the loans board doesn’t get the money until October, or maybe November.  Cue student riots.

4)      The ability to track and contact students.  At a minimum, you kind of need a phone directory.  Most of Africa and Asia, which got mass telephony with the cell phone, doesn’t have that.

5)      A credit bureau.  Valuable partly because they help track borrowers, they’re also important because without them, there are few consequences for defaulting.  In African countries where credit bureaus do not exist student loan programs lose over 50% of their loans.

6)      Privacy.  Some countries don’t have our pesky privacy laws.  Kenya, for instance, will publish the names of delinquent students’ in the paper.  It’s remarkably effective.

7)      A belief that recent graduates should have adult middle-class living standards.  As I’ve noted previously, in much of Asia, loan repayment periods are 4-6 years.  No one thinks this is onerous.  The attitude is, “you’re young and unmarried – pay this off, then move out of your parents’ house and start consuming”.

All of which is to say that technology, laws, institutions, and social conventions play a huge role in how student aid is administered.  We take it all for granted… but every once in awhile, we should step back and remember how fortunate we are that we can do so.

October 23

The Best CFS Chair Ever

I see Brad Lavigne has a new book out about his years as Jack Layton’s campaign strategist.  Time perhaps to mention his other big accomplishment: namely, being the best Chairperson the Canadian Federation of Students (CFS) ever had.

The mid-1990s were an ugly time in Canadian PSE.  Federal and provincial governments were broke, and cutting back everywhere.  Partly as a result of this, the student movement polarized – a more left-wing leadership took over the organization and purged the moderates, who returned the favour by leaving CFS, and joining up with a previously-unaligned group of schools to create the more moderate Canadian Alliance of Student Associations (CASA) (full disclosure – I was CASA’s first National Director).  In 1996, Lavigne became CFS chair.  He was seen as one of the hardliners, but when Lavigne got to Ottawa, it was clear that he didn’t want to just rant and rage at the government.  He wanted some wins for students, and he was prepared to compromise to get them.

And so with this intention Lavigne took CFS into a seven-member coalition to improve student aid, which included not only their nemeses at CASA, but also the University Presidents represented by AUCC.  The coalition kept clear of the divisive issues like tuition, and focused solely on issues of student debt, which everyone agreed was bad.  It held together on a common platform for over a year, which reassured the federal government that it would get approval, not opprobrium, for agreeing to invest in this file (less than 3 years on from an infamous macaroni-throwing event, involving then-HRDC Minister Lloyd Axworthy, this kind of re-assurance was still necessary).

The result was the 1998 budget, the single biggest investment in student aid ever made in Canada.  It expanded interest relief considerably, making life easier for hundreds of thousands of borrowers.  It created a set of grants for students with dependents (a key CFS aim at the time), the Canada Education Savings Grants.  And it injected – what would become – $3.6 Billion worth of grants into the student aid system through the creation of the Canada Millennium Scholarship Foundation. Had Lavigne not brought CFS to the table, it’s quite possible none of it would have happened.

Unfortunately, his own members turned on him, thinking he’d gone too far in terms of co-operation.  In the end, he was made to criticize the deal he’d done so much to facilitate – on the lunatic grounds that it was all unacceptable if the 1995 transfer cuts weren’t restored.  As a result, CFS never took ownership of what was clearly its greatest-ever success, and Lavigne’s work was never recognized for what it was: a real act of statesmanship.

CFS – heck, the whole country – could use more student leaders like him.

October 01

How the Zero-Tuition Crew Could Learn to Love Tax Credits

So, let’s say you’re among those who clings to the idea that tuition isn’t just a massive give-away to upper-income families.  Let’s say you really, really believe that tuition – sticker-price tuition, none of these “net price calculations”, thank you very much – affects access.  How would you go about gathering evidence for your point of view?

Ideally, of course, there would be some data showing that, as fees went up, participation went down.  Problem is, the data doesn’t show this.  To wit:

Tuition + Ancillary Fees (in $2013) and Participation Rates, Canada, 1993-94 to 2012-13













Well, OK then.  Maybe if you’re desperate to prove a point, you might relax your scruples about counting grants against tuition.  Maybe it’s all the extra student aid pouring into the system which has made a difference?

Tuition + Ancillary Fees (in $2013), Net Fees (i.e. Minus Grants) and Participation Rates, Canada, 1993-94 to 2012-13













Well, no.  Damn!  Now what?

Well, here’s one possibility.  Check this out:

Real Tuition + Ancillary Fees, Minus Grants and Tax Credits, as a Percentage of Average After-Tax Family Income













If you add grants and tax credits, and adjust for inflation, and then adjust for median family income, you get to the point where you realize that, in fact,  fees were more or less constant in terms of affordability over the last decade or so.  So voila!  That damnable rise in tuition fees that so inconveniently accompanied the increase in participation rates?  Turns out it didn’t happen – at least if you properly count subsidies.  In fact, one could now convincingly argue that the lack of a relationship between fees and participation is a huge hoax, and that the rise in participation was actually fuelled by the massive infusion of tax credits and grants over the past fifteen years, which effectively netted out the impact of tuition.

There’s a slight problem with all this, of course.  And it’s that the zero-tuition crowd has a long track record of claiming that subsidies have no effect whatsoever, because sticker price is the only thing that matters.  No one thinks tax credits have any effect on participation, and the more hardcore of the zero-tuition crowd don’t believe grants matter either (True story: a long-time student leader informed me the other day that the whole concept of net tuition was bogus, and that grants should never be included in discussions about affordability, because “grants don’t reduce tuition, they just help you pay for it”.  Yes, really).

So the zero-tuition crowd has three choices here:

  • They can keep their beliefs about subsidies, but accept that participation has risen along with tuition, and admit that, perhaps, their views on tuition are wrong.
  • They can renounce everything they’ve ever said about subsidies, run with the idea that affordability has not been deteriorating, and arguing that this is what has fuelled the rise in participation.
  • Ignore all empirical evidence, and continue their evidence-free approach to the whole question.

No prizes for guessing which is likeliest.

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