HESA

Higher Education Strategy Associates

Category Archives: student debt

October 07

Do the Poor Really Pay More?

There’s a trope out there that goes something like this: “Loans are unfair because interest on the loans means that needy students pay more in total to go to school than students who don’t need a loan“.  If it were true, this would indeed be problematic.  But the thing is, for the most part, it’s not.

Let’s follow two hypothetical students: Claudia and Eveline.  Claudia can manage to pay $25,000 for her four years of tuition, upfront; Eveline cannot, and she borrows $25K from Canada Student Loans and her provincial student aid program over four years.  Assume that inflation is a constant 2%, and that interest during the repayment period is 6.25% (over the last few years, real interest rates have floated between 400 and 450 basis points above inflation).

Student loans carry zero interest during the in-study period.  This means students actually make money while they’re borrowing because inflation eats away at the value of the loan before they’re required to pay it back.  In Eveline’s case, she effectively makes $1,125 between the September she starts and graduation day.

Then, of course, things start to work in the other direction.  Assuming Eveline takes eight years to pay off her student loan, she ends up making $4,321 in interest payments (figure is net of inflation).  Take away the $1,125 that Eveline “made” during the in-study period and the net interest cost comes to $3,196.

If that were the end of the story, the people who claim loans are “unfair” would be right; we would be discriminating against the poor.  But that’s not the end of the story because people who get loans usually also get grants.

If you’re an independent student making less than $38K per year and you apply for aid, you are nailed-on for an extra $2,000 per year – that’s $8,000 over the course of a degree.  Ditto if you’re a dependent student and your parents make less than $38K.  If you’re a dependent student and your parents make less than (roughly) $76K, you’re nailed-on for another $800/month – or exactly $3,200 over four years, which wipes out the interest cost of the loan.  Plus, of course, you get 15% of all interest paid as a tax credit – which means you actually come out ahead by a few hundred dollars.

Are there borrowers who don’t come out ahead?  Yes.  Those who borrowed but had family income high enough that they didn’t qualify for the middle-income grant likely wouldn’t receive a grant to offset the loan interest amount.  Borrowers who take more than eight years might end up with higher interest charges not covered by their grants (and possible remission).  There are enough variables here that it’s hard to say how many people this might include.  But remember – the base population that doesn’t get sufficient offsetting grants consists of dependent students with family incomes over $80K, that’s *maybe* 20% of all borrowers (and not the poorest 20% by any means).  Or to put it another way: probably something like 80% of borrowers are receiving more in subsidies than they pay in real interest over the life of their loan.

That’s a good thing – an outcome of our generous, if opaque, student aid system.  We should acknowledge it, celebrate it, and most of all get the usual suspects who adore this talking point to shut up about it.

May 26

Tuition Fees and Inequality

Stop me if you’ve heard this one before: it’s unfair that some people graduate with debt, and others don’t.  The ones that do tend to have started off poorer to begin with.  And so instead of being a means of social mobility, tuition ends up being a means of perpetuating it – the ones who start off poorer end up poorer.  That’s bad, and that’s why we should have no tuition.  Eliminate tuition and you eliminate inequality.

Let’s take this one-by-one.

First of all, eliminating tuition doesn’t eliminate debt.  Sweden, famously, has both free tuition and significant debt.

Second of all, while the notion that the poor are the ones with debt is mostly true, it’s not entirely so.  Some well-off kids borrow – usually in their fifth year when their parents’ income no longer counts against them in the need assessment process.  And some poorer kids get through without loans by working and living at home.

But the most important of all is a point articulated by the American writer Matt Bruenig in this article: eliminating tuition does not, in any way, change inequality between rich and poor students.  To a large degree, the kids who graduate without debt do so because their parents pay their bills.  If you make tuition free, it reduces (but does not eliminate) the need to borrow; it also means that wealthier parents get to save their money.  The gap between rich parents and poor parents is not made narrower: they are both saving the same amount of money.  And the idea that the gap between graduates is made narrower depends entirely on the notion that rich parents will look at all that money they’re saving and not pass it on to their kids.

Does anyone really believe that?  Does anyone really believe that if rich parents had more money they’d pass less of it on to their kids?  No?  Then your argument relating tuition to the perpetuation of inequality is wrong.

Bruenig makes the argument – correctly – that if you are going to base your tuition policy around the idea that it should serve to reduce inequality (something many sensible people would think is nuts), then the only way to do that is by charging sharply progressive fees.  Ask the kids from poorer families to pay little or nothing, and ask the kids from wealthier families to pay more.  And in practice the way you do that is by charging high fees and off-setting it with need-based grants.

Anything else fails the inequality-reduction test, simple as that.

May 23

New Data on Student Debt: the 2010 National Graduates Survey

The National Graduates Survey figures on debt for the class of 2010 were (quietly) released yesterday.  Unlike the employment data they released a few weeks ago, this data actually *is* comparable to results from previous surveys.  It is thus a good way to check on whether/how student debt is actually reaching “out of sight” levels.

So, let’s start with some interprovincial comparisons.

Average Government Student Loan Debt at Graduation, Borrowers Only, By Province and Type of Institution, Class of 2010

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The national average government debt among borrowers was $22,300 for university graduates, and $14,000 for college graduates.  However, this conceals some pretty wild differences between provinces, especially at the university level where the provincial means extend from $11,900 in Quebec to $35,000 in New Brunswick.  Of particular interest is the fact that Ontario, the province with the highest tuition, actually has among the lowest levels of debt (indeed, between 2000 and 2010, it fell nearly 17% in real terms).

Looking at the data over time, the next two figures show how government student loan debt has evolved:

Incidence and Mean Amount of Government Student Loan Debt at Graduation, Bachelor’s Degree Borrowers Only, 1982-2010

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Incidence and Mean Amount of Government Student Loan Debt at Graduation, College Borrowers Only, 1982-2010

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The takeaway here: despite steadily rising tuition, the percentage of students taking out need-based loans to finance their education hit a thirty-year low in 2010.  Debt was still high, but in real dollars was below where it was in 2000.

Now, while need-based government debt has been falling, non-need-based (or at least, not necessarily need-based) private debt has been rising.  Private debt is a mish-mash of credit card debt (which most surveys suggest is pretty small), private bank loan debt, and debt to family members – the last of these is presumably fairly soft debt in the sense that it is available on highly negotiable terms and there is a reasonable chance of some form of debt forgiveness.  Incidence of all forms of these debt combined has risen from 19% to 26% among bachelor’s graduates since 2010 (16 to 22% among college grads), and average debt from these sources (among those with any amount of such debt) has risen from $13,170 to $17,700 for bachelor’s graduates ($8,300 to $10,000 for college graduates).

It’s not clear what to make of the private debt figures.  For the 15% of the student population that has both public and private debt, one assumes that the recourse to private debt is indicative that for this part of the student body, the existing student aid packages are inadequate.  This is a group we should be pretty concerned about.  As for the other 11% who only have private debt, it’s hard to say what the issue is.  Why are they choosing private money over public money?  Are they actually fairly well-off, and hence ineligible for aid?  We simply don’t know.

In any case, as a result of this increase in non-public debt, total debt is up very slightly, as we see in the figure below.  But while the averages of debt are up, the incidence is down – from 53% to 50% on the university side, and from 49% to 43% on the college side.  And this, recall, in a period where participation rates were growing sharply.

Average Total Debt at Graduation, Borrowers Only, By Type of Institution, Classes of 2000, 2005 and 2010

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So: government debt down, private debt up.  Incidence of total debt down slightly, average debt up slightly.  Any way you look at it, the basic picture on student debt is right where it’s been for the last decade.  And meanwhile, interest rates have fallen, and after-tax incomes have risen.

I know facts never get in the way of a good story, but: There.  Is.  No.  Crisis.  Period.

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 27

New Student Debt Numbers

So, the more stat-minded among you may have noted the release, this past Tuesday, of Statistics Canada’s 2012 Survey of Financial Security (SFS).  Though the main talking points were largely about mortgage debt, it also contained some interesting statistics on student debt.

Now, remember that these are figures on outstanding student debt.  Some of it will be in repayment (i.e. held by graduates now in the labour force), and some of it will not (i.e. held by current students).  The way to think of these debt figures is as a collective portrait of people who borrowed in the decade or so prior to the snapshot, and who had not yet fully repaid their debt (because those who had successfully completed repayment would be out of the sample).  So the 2012 figure for student debt is actually a collective picture of the outstanding debt of everyone who borrowed in the period 2002-2012, and who had not yet repaid, the 2005 figure covers the period 1995-2005 or so, etc., etc.

Anyways, the headline that the usual suspects would like you to focus on is the one about aggregate debt outstanding: $28 billion, up by $5.5 billion (23%) in real dollars since the last time the study was conducted, in 2005.  Why is that a big deal?  Because!  $28 Billion!  Big Number!  But a slightly more intelligent look at the data shows a different story.

Figure 1 shows that the average outstanding student loan was about $15,000.  That’s up about 6% from 2005, and 13% from 1999 (again, all figures are inflation-adjusted).  Why is this figure so much smaller than the one for total debt?  Simple: more people have outstanding student debt than in 2005, so it’s divided among a larger population.  That might be because people are taking longer to repay their loans – more likely, though, it’s a reflection of the fact that student numbers as a whole rose substantially over the 00s.

Figure 1 – Average Student Debt Among Holders of Outstanding Student Loans, in $2012

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Intriguingly, the data for median student debt (that is, the mid-point value, rather than the mean) tells a slightly different story, in that it fell 2% between 2005 and 2012 (though it has still risen a bit since 1999).

Figure 2 – Median Student Debt Among Holders of Outstanding Student Loans, in $2012

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How should we interpret this?  This isn’t the easiest data to unpack.  It probably means, as I pointed out back here, that student debt hasn’t been increasing.  But it also might mean that debt repayment rates have been increasing along with indebtedness, or (less likely) that a greater fraction of student loans are held by individuals who graduated from shorter programs.

Whatever the truth, what we do know for sure is that young people aren’t drowning in student loan debt.  Among family units headed by people under-35, only a quarter hold a student loan, and the loan debt constitutes just 5.3% of their total debt, down from 6.7% in 2005.  Whatever the effects of student borrowing is, it would appear that deterring graduates from taking on ever-larger mortgages isn’t one of them.

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

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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)

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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?

January 28

Why Student Debt Burden is Falling Like a Stone

Everyone talks about “rising student debt burdens” as if they are real.  But they’re not.  In fact, the burden of carrying a student loan has fallen significantly over the past decade.

Student loan burden is best measured by looking at the percentage of monthly after-tax income that it takes to service a loan each month.  This figure will therefore be affected by four different factors, namely: the size of student loan debt, interest rates, post-graduation income, and taxes.  Here’s what’s happened to each of those over the past 25 years:

1)      Student debt rose very quickly in the 1990s, more than doubling between 1992 and 2000.  This was because the federal government raised lending limits, and provinces by-and-large cut their grants programs.  Starting in the early 2000s, however (for reasons I’ll get into tomorrow), growth in student borrowing stabilized.  As a result, student debt has been roughly constant in real terms for over a decade now, as I showed back here, and may even have decreased a bit.

2)      Interest rates.  Nobody remembers this, but during the early 1990s, when we had the triple-whammy of the peso crisis, the sovereignty crisis, and an inflation-obsessed John Crow as Governor of the Bank of Canada, our interest rates were regularly 400 basis points higher than the Americans’.  They’ve come way, way, way down.  In 1991, prime briefly hit 14%, and throughout the 90s it averaged about 7.5%.  Today it’s 3%.

3)      Post-Graduation Income has remained remarkably constant over time.  Between 1988 and 2005, it didn’t change a bit in real terms.  Growth has been below inflation in the last few years because of the long recession, but it is still growing in nominal terms (we know this thanks to the many provincial graduates surveys, which have replaced the NGS as our key source of data on this subject).

4)      Taxes.  They’re down a fair bit.  Someone with average graduate income, 2 years out of school, paid out 28% of their income in taxes in the early 90s; now they pay 22%. (Thanks to Kevin Milligan and his great CTaCS program for the help in calculating this.)

In other words, things were pretty bad in the 1990s.  But since then, most of the relevant forces that underpin student loan burden have been heading in the right direction: debt is stable, or even down a bit, interest rates are down, taxes are down, and until quite recently income was more or less stable – and even now isn’t down very much.  Put it all together and what you see is that the after-tax repayment burden for someone with average student wages, repaying an average-sized student loan, has fallen sharply in the last decade:

Figure 1: Percentage of Average After-tax Earnings of Graduates, 2 Years Out, Required to Service an Average Student Loan

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That’s right: the burden of carrying an average loan, with an average salary, has fallen by over a third in the past decade.  It’s actually back down to where it was in 1992, before the rapid rise in tuition and debt of the 1990s.

I no longer expect facts to get in the way of people trying to manufacture a good crisis, but if anyone does happen to care about the data, there you go.

January 20

Canada’s Income-Contingent Loan System

I see that yet another group has called for Canada to have an income-contingent Loan Program to help students fund their higher education studies.  Great idea.  In fact, it’s so great that the country adopted an income-contingent system five years ago. It’s just that nobody noticed.

Many people think that income-contingency requires that loan repayments be a fixed percentage of individual income, or that loan recovery be handled through the tax system.  While it’s true that some of the world’s more prominent examples of income-contingency (e.g. Australia, UK) have those features, those aren’t necessary characteristics of an income-contingent system.  All “income-contingent” means is that repayments to some degree reflect a borrower’s ability to repay.

Canada has had some element of income-contingency ever since the “Interest Relief” program was introduced in 1984.  Something of a misnomer, Interest Relief allowed unemployed borrowers in re-payment to suspend principal repayments for up to 18 months, during which time government would pay the interest on the loan.  The program was expanded in 1994 to include borrowers who were employed but had high debt service ratios.  In the 1998 Budget, the time limit went up to 30 (or in some cases 54) months.  That budget also announced a system whereby borrowers who didn’t quite meet the test for full interest-relief could get a partial subsidy – unfortunately, this system was never implemented, because the government, and the banks who administered the program at the time, couldn’t figure out how to make it work properly.  But the idea came back again in the 2008 Budget, with the introduction of RAP, which was basically the 1998 plan with some knobs added on.

So, like Australia and the UK, we have a system where borrowers with low-income pay nothing, and a system which phases in loan repayments gradually as borrowers begin to earn more money.  The only major difference between Canada and Australia/UK is that we say if you’re above a certain income level, you should be paying off a loan quickly under a normal system of amortization, whereas they say the hell with it, and just take a proportion of your income because it’s simpler to manage that way.

Why don’t we call it income-contingency?  Basically, it’s because no one wants to embarrass the Canadian Federation of Students (CFS).  For years, they insisted income-contingency was the work of Satan because in making loans easier to pay it paved the way for higher tuition fees (yes, really).  Yet, as the details of RAP were developed, they decided they quite liked it.  Since it’s rare CFS actually backs a government program, it was generally agreed that pointing out to them that that RAP was in fact income-contingency (which they still in theory strenuously oppose) would create unnecessary problems.

So there you go.  We have a reasonable student loan repayment system, which the main players like but no one else understands.  It’d be nice if we could find a way to communicate this to the country so we could stop with the inane demands for income-contingency, but c’est la vie.

October 31

Parents, Transfers, and Debt

A few weeks ago, CBC ran a story about parents taking on debt so that their kids didn’t have to.  It’s a story worth parsing carefully, because it’s a great example of how economically irrational people can be when it comes to debt.

One family in this story recounts shelling out $200,000 for their three kids to go to university.  They even went into debt themselves to do it.  But they wanted to do this, apparently, because they wanted their kids to have flexibility and freedom when they graduated.  This would allow their kids to take time to work out what they wanted to do, instead of being forced into work quickly.

Hmmmmmmm.

Let’s leave aside for the moment the question of why anyone would take on debt at commercial rates when your kids could borrow interest-free from a public loan program (though, let’s face it, that’s kind of nuts).  If the only thing you’re worried about is making sure your kids are making stress-free career decisions, then why not let the kid borrow the money, and then agree to assume the loan repayment for the first couple of years after graduation?  Or let the kid ease into repayment by gradually transferring the burden (25% in the first year, 50% in the second, etc.)?  It’s far cheaper, and doesn’t require the student to take on any burden until they’re ready. It should be a slam dunk, no?

The problem, I think, is that transferring money to your kids while they’re in school is socially acceptable in a way that paying for your kids debts is not.  It’s not simply a matter of pre-graduation = child, post-graduation = adult, and that gifts to children are more acceptable than gifts to adults; giving large sums of money to your kids still is acceptable even after graduation, as long as it’s attached to certain types of life events (e.g. marriage, buying a house, etc.).  Taking on debt, as David Graeber has pointed out, presupposes adulthood, since debts can only be incurred between legal equals.  And settling debts, making good on one’s obligations, is intrinsically connected to notions of virtue and honour.  Interfering with this – offering to make payments in a child’s stead – is in some ways seen as interfering in a rite of adulthood in a way that simply handing them money prior to graduation is not.  Effectively, it’s emasculating.

There are many culturally-rooted views about debt out there, and policy can’t be made to accommodate them all. Equally, though, there’s no reason to assume that, just because government comes up with economically “rational” policies, students and families will react to them in a “rational” way.  There’s way too many notions of innocence, duty, sin, and honour tied up with children assuming debt for the first time for that to be possible.

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