Category Archives: student debt

April 01

A Persistent Problem with Truth

When it comes to the subjects of debt and tuition fees, the Canadian Federation of Students (CFS) is the least trustworthy source on earth. They lie. Constantly.

To see the latest collection, just look at this press release, which averages roughly one lie per paragraph. For instance:

“Since 2006, tuition fees have increased as much as 71 per cent in Ontario”. The words “as much as” are doing a lot of work here. For the vast majority of programs, the 5% annual increase has meant an increase of about 47%. And for full-time students benefitting from the 30% rebate, it’s only 17% – which is less than inflation.

“Average student debt after a four-year degree is $37,000 for debt from public and private sources”. No, that’s the average for the small proportion (12% or so) of students who have debt from both public and private sources. Across all students with debt, it’s in the $26,000 range. Across all students, it’s about $16,000.

“The Ontario Liberals committed to reducing tuition fees by 30 per cent in the last election…”. No, they committed, quite specifically, to a rebate of 30% for full-time undergraduate students from families earning under $160,000.

“… their Ontario Tuition Grant has reached fewer than one-quarter of students in the province”. As I pointed out, here, this is only true if you include 300,000 college part-timers taking less than one course per year, 60% of whom are having their education paid for by their employers. Which, since no one thinks they need a tuition break, is pretty dubious.

“… untold number of youth being shut out of accessing a college or university education every year”. Ontario has the highest rate of combined access to university and college of any province. If tuition has an effect, the one place it isn’t showing up is in access rates.

These aren’t honest mistakes made by idealistic youth who aren’t good with statistics. The CFS has many professional staff who are paid to know this stuff, some of whom have been around for decades. They know perfectly well what the real data says; they just think that that lies are acceptable so long as they’re deployed in service of their cause.

And really, why wouldn’t they think that? Ministers still meet with them. Journalists and opposition parties, thinking them a reliable source, regurgitate their lies uncritically all the time. Usually, when interest groups take this kind of liberty with the truth, they lose credibility and, hence, access to power. For some reason, CFS never face any consequences for telling lies.

But maybe, for the sake of restoring honesty to debate, it should.

March 26

The Curious Case of Disappearing Student Debt

If you’re one of those people who obsessively follows stories about student debt, it’s possible you’ve heard some rumblings about the latest Canadian University Survey Consortium (CUSC) survey, which seems to show a drop in student debt over the last three years.

CUSC is an important source of information about student debt in Canada. Every three years, this consortium surveys a few tens of thousands of graduating students, and asks them (among other things) about their outstanding student debt. We need this source of data because the National Graduate Survey only comes out every five years (too infrequent for most policy purposes), and the feds and provinces have yet to come up with a way to jointly report debt statistics (joint reporting being necessary, given that students receive loans both from federal and provincial governments).

Anyways, here’s what the CUSC data shows in terms of borrowing incidence:

Incidence of Borrowing, by Source, 2003-2012

The small uptick in borrowing incidence is about what you’d expect. But where this data gets weird is when you look at the amount of total borrowing:

Mean Amounts of Borrowing (Among Those Borrowing), by Source, 2003-2012, in Real 2012 Dollars

Contrary to all expectations, overall debt fell by 14% in real dollars between 2009 and 2012. So, what’s going on here?

One possible answer concerns participation in CUSC, which changes slightly from year-to-year. Of the institutions who took part in the 2009 survey, twenty-six participated again in 2012; eight institutions left (notably Alberta, Calgary, UBC, and UVic), and ten came in (including York, Waterloo, Sherbrooke, and UQTR). Clearly, the addition of a couple of low-debt Quebec schools, and the absence of high-ish debt schools from British Columbia, is an obvious possible explanation for this mystery.

Except: in 2012, for the first time, CUSC weighted its response data by the size of each institution’s graduating class. Given the makeup of participating schools, this shift means that, in fact, 67% of weighted 2012 responses comes from high-debt jurisdictions (Saskatchewan, Ontario, New Brunswick, and Nova Scotia), compared to just 62% in 2009. Given what we know about regional differences in debt, from previous National Graduate Surveys, the new sample should, ceteris paribus, have actually delivered a slightly higher debt number. So the change in sample doesn’t seem to be the answer.

Other explanations? Well, total grants issues in Canada did increase, slightly, after the replacement of the Foundation with Canada Study Grants, and the class of 2012 would have benefitted from a few extra years of Canada Education Savings Grants, but neither seems likely to have changed borrowing patterns this much. It may also simply be greater prudence – students spending less in hard times.

Makes you wish we had better statistics, doesn’t it?

March 15

The US Debt Freak-Out

If you read the US papers at all, you’ll have noticed a recent ratcheting-up of panic about student debt. Take Charles Blow’s recent New York Times column, which describes US debt levels as “staggering”, and having “long-term implications for our society and our economy, as that debt begins to affect when and if young people start families or enter the housing market.”

Some facts are in order.

It is certainly true that, in the United States, it’s possible to accumulate some absolutely staggering amounts of student loan debt, to no good purpose. Law grads, in particular, routinely rack up six-figure debts, only to end up in positions with mid-five-figure salaries (do read Paul Campos’ Don’t Go to Law School (Unless) – it’s an eye-opener on this topic). But those numbers are severe outliers. In fact, among the 60% of American students who borrow, the average debt is about $27,000 – with median debt being somewhat lower.

Sound familiar? It should. Those numbers are almost exactly the numbers we’ve had in Canada since the turn of the century. And though life isn’t as easy for young people with loan debt today as it was thirty years ago, it’s not as though the last decade’s worth of graduates are some kind of immiserated proletariat. Against expectations, the rise in debt in the 90s didn’t reduce access (quite the opposite, actually), and it didn’t lead to a generation of debt peonage. In fact, grads in their late 20s and 30s live pretty much the way they always have. True, home ownership rates have fallen among the under-40s, but that has at least as much to do with a historic rise in house prices as it is does student debt. In short, current levels of debt don’t have major behavioural or life-course consequences.

So, are Americans freaking out to no good purpose? Only partly. There are two good reasons why a similar level of debt in the US might be more consequential than it is here. The first is that, with weaker safety nets, the consequences of falling into poverty are much, much worse. The second reason is that the US student loan policy choices have been sub-optimal.

In Canada, thanks to Interest Relief (and later, the Repayment Assistance Program), students with incomes into the mid-$20,000s are exempt from making payments on their loans. In the US, the threshold for loan deferment is, in practice, about half that, meaning that, unlike in Canada, some very poor borrowers can be required to make large loan payments. America could have copied us in ensuring a good safety net for the poorest; instead, they chose to subsidize student loan interest rates across the board, regardless of need.

High levels of student debt are manageable. It just takes good policy choices.

March 12

Measuring the Effects of Student Loans

Measuring the effects of student loans is brutally difficult. It sounds simple, but it’s not.

Take a recent article called “Gender, Debt, and Dropping out of College“, published in Gender and Society, which made a small wave in access-conscious circles a couple of weeks ago. Using data form the 1997 US National Longitudinal Survey of Youth, this article made two claims: first, that debt was positively correlated to completion up until a certain level of debt, after which the relationship reverses itself somewhat (though the relationship remains at all times positive); and, second, that this effect was greater among men than women – that is, at any given level of debt, the positive effect on graduation was more pronounced among women than men.

(Unfortunately, in the online commentary, the last point tended to be summarized as, “debt has more of an adverse effect on men than women”, which isn’t the same thing at all).

Now, debt is not an exogenous variable. It doesn’t come out of nowhere. It implies financial need, which, in turn, is a function of both socio-economic background and academic achievement. It also implies a preference for borrowing over working. Persistence is also a mutli-dimensional issue. As generations of researchers have discovered, since Vince Tinto started working in this field nearly 40 years ago, there are a whole host of inter-correlated factors that affect persistence, of which finances are just one. So linking the two causally is a tall order.

One of the best papers ever on this subject was written a few years ago by University of Ottawa professor, Kathleen Day. Using Canada’s Youth in Transition Survey, she found a small but positive relationship between student aid and perseverance in studies (though when “aid” was disaggregated into loans, grants, and scholarships, the effect was no longer detectable). She then re-estimated her models to account for the possibility that aid and debt were both related to another unobserved variable, and found that the relationship between aid and persistence turned negative. (That’s not to say aid is ineffective, but rather that the available data doesn’t permit a conclusive answer.)

Back to the Gender and Society paper, which has a variety of flag-raising methodological limitations. There are no controls for student labour market participation, for a start. Family income is treated as a trichotomous variable (high, medium, low) rather than a continuous one. The paper also seems to not account for credits accumulated, or number of years enrolled, which is very odd. Most seriously, it doesn’t account for the possible unobserved correlated variables.

Given this, I’d take the article’s conclusions with a truckload of salt. It’s interesting, but far from conclusive. We’re still a long way from understanding the effects of debt.

December 11

Manageable Debt, Part 2

Yesterday, we looked at the principles underlying the discussion on manageable student debt; today we examine how Canadian governments try to help students manage debt, and whether or not their efforts are as efficient as they could be.

Manageable debt loads are a function of three things: total debt, interest rates, and student income. The last of these three is only vaguely susceptible to government control, but governments can control program interest rates and total debt loads through direct subsidies. What remains odd about Canadian student aid is that our governments use these tools in such an ineffective manner.

Let’s start with interest rates. Unlike the Netherlands, where, throughout the loan’s life, student loans have one low interest rate (equal to the government rate of borrowing), our system has negative real interest rates while students are in school, and then strongly positive rates (prime plus 2.5%) during repayment. Adopting a more Dutch-like system would raise debt-at-graduation slightly, because interest would be charged while students are in school — for the average student, the increase would be about $2000. However, monthly repayments would actually be lowered by about 8% thanks to lower interest rates after graduation. Since the Dutch approach is essentially cost-free, it’s a bit of a mystery why we haven’t adopted it, given its obvious positive affects on debt-management.

Or take remission. What matters in terms of debt manageability is debt at the time a student finishes; yet, nearly all provinces base their debt-management programs on annual debt levels. Thus, in Ontario, someone who borrows $6,900/year for four years graduates with $27,600 in debt and never sees a penny of remission, while students who borrow $10,000 for a single year (a pretty typical situation, given the rules we have about students becoming independent in their fifth year of studies) get a $3,000 debt write-down from the province.

Why do we do this when it makes so little sense from a debt management perspective? The answer, mostly, is History. Remission programs were introduced in the early 1990s to replace grant programs that had become unaffordable. Since those old programs delivered money on an annual basis, it made political sense for these new ones to do so as well.

But maybe it’s time to take another look at this. Alberta has long had a policy of capping total debt per degree; and, moreover, it varies the size of this cap by program – doctors, sensibly, are allowed to take on a lot more debt than humanities students. Properly targeted, this approach could be substantially more efficient at ensuring manageable debt than what most provinces are currently doing. An Alberta Advantage, indeed.

December 10

Manageable Debt

One of the big questions in student loans these days concerns “manageable debt”. How much debt is manageable, exactly? And how do we best help borrowers whose debt is unmanageable?

As nearly everyone agrees, manageable debt is a flexible concept. For someone with no income, pretty much any amount of debt is unmanageable. As income rises, however, an increasing amount of debt can be serviced. Interest rates and repayment terms matter too, of course; any established debt-to-income ratio is a lot easier to manage with rates at 4% over twenty years, than it is at 8% over ten years.

National student loan programs around the world have been wrestling with the concept of “manageable debt” for roughly 20 years, now. Income-contingent programs – like those in the UK and New Zealand – work on the principle that low-income borrowers pay nothing, and then, once their income exceeds the floor, pay a percentage of marginal income. But even programs which do not label themselves as income-contingent (such as the US, Canada, the Netherlands, Germany, and Sweden) all establish similar thresholds, below which students are asked to pay nothing – an implicit acknowledgement that, below a certain level of income, no debt load is manageable.

There’s a discussion to be had about where that debt threshold should be; most countries locate that point somewhere in the mid $20Ks (the United States places their threshold much lower, while Australia’s is set a little higher). But there’s a second discussion, one focusing on the appropriate load amount, once one exceeds the threshold. The UK and New Zealand systems essentially say that students should pay the same amount on each marginal dollar (e.g. 10 cents on the dollar); Canada’s Repayment Assistance Program (RAP) and the Australian system both suggest that the load should increase gradually, as one’s incomes moves above the threshold. The latter is almost certainly the right approach since the higher one’s income is above the “minimum threshold”, the more income one has available to deal with debt. Nevertheless, there remains much room for legitimate discussion about how to phase in higher repayment rates.

Carleton’s Saul Schwartz and his colleague, Sandy Baum, from the College Board wrote a comprehensive summary of different ways to look at concepts of “manageable debt”. The key take-away from the Schwartz and Baum paper is that there isn’t a single answer to this question, and that any final answer is, in part, a normative one. At the end of the day, it still comes down to a judgment call by policy-makers as to what kind of standard of life new graduates should have, and whether or not it’s worth it for the public to subsidize that standard of life.

Tomorrow: a look at those subsidies, and how well they hit their mark in Canada.

November 20

The Debt-Free Graduate Argument

No, I’m not talking about Murray Baker’s long-running franchise. I’m talking about the argument that having indebted graduates is a drag on the economy. It goes like this: indebted graduates consume less than debt-free graduates because they are repaying their loans. If they had fewer loans, they’d spend more money, with inevitable multiplier effects on the economy. Hence less student debt = more economic growth. (For an example of this thinking, see here).

While this certainly sounds attractive, it ignores something important: namely, opportunity costs.

There are four ways that government can generate money to reduce student debt. It can tax, it can borrow, it can raid other areas of government spending or it can reduce the cost of educational provision (for instance, by cutting faculty). There may be a variety of arguments in favour of any one of these, but raising aggregate consumption really isn’t one of them.

Say government raises taxes to reduce student debt. Undoubtedly, future graduates will have more money to spend; but only at the cost of decreasing the purchasing power of today’s taxpayers. Borrowing is even less of a solution, since what future graduates gain in purchasing power is going to be more than offset by future tax rises required to pay off the borrowing.

What about re-allocating spending? We could, for instance, spend less on the military, or portraits of the Queen, or agricultural subsidies (take your pick, add your own). The source of the money is more or less irrelevant; what matters is that it’s being taken out of the hands of someone in today’s economy today, so as to improve the lives of tomorrow’s graduates. There’s no necessary net benefit to the economy as a whole here, either.

Finally, there’s reducing the cost of providing education in the first place. At least this option “keeps it in the family” (so to speak), but it’s the same deal; professors and administrators pay now so that recent graduates’ consumption can rise in the future. Of all the arguments, this one might at least plausibly have some extra benefit in terms of stimulus, since professors and administrators are likely to save a larger proportion of it than would students. But it’s still a pretty weak case.

The economic argument for publicly subsidizing higher education is that in the long-run it boosts productivity and hence raises the standard of living. But since it’s really not clear at all that reducing tuition or debt actually makes a blind bit of difference to access let alone productivity, it probably makes more sense to give a marginal dollar to colleges and universities to improve learning outcomes than to increase the spending power of recent graduates.

May 22

Does Debt Affect Career Choice?

A lot of hypotheses about the negative effects of student debt (some of which I was responsible for, 15 or so years ago), have, over time, been shown to be wrong. The one about debt being a serious deterrent to access, for instance (at least at current levels of borrowing); or the one about how increased student debt delays family formation. But what about the hypothesis that higher levels of student debt might leading students to take “jobs that pay a lot of money” rather than “jobs that are socially useful”?

One paper which seemed to confirm this hypothesis was Constrained After College: Student Loans and Early Career Occupational Choices by Jesse Rothstein and Cecilia Rouse. Using administrative, financial and alumni data from an “anonymous university” (blatantly obviously Princeton), the authors examined the effects on employment of an institutional aid reform which saw loans replaced entirely with grants. They found that after the policy switch, students who received aid took jobs with lower average incomes, while students who were not on aid saw no change in their income patterns. Most of the action happened at the bottom end of the scale – there was no reduction in the proportion going on to investment banking and consulting – the shift was mainly from lower-paying private sector jobs into the non-profit sector.

This is an excellent paper, but still – it’s Princeton. Can you really generalize from that kind of sample?

We thought we’d attack the question from another angle by asking students what they will be looking for in a job after graduation: earning potential, balance between work and personal life, fulfilling work, mentorship and learning possibilities, work involves creative rather than routine tasks, flexible working schedule. Then we paired the different options against each other and asked students to tell us which they preferred (matched pairs are a great way to reveal preferences). Finally we looked at how students answered the question based on whether or not they had loans. If the debt hypothesis is true, then you’d expect loan recipients to sacrifice all that good stuff for a job with a higher earnings potential

Here’s how it turned out:

Interesting, huh? And yeah, we checked – the result doesn’t change the closer students get to graduation (and accumulate more debt).

Now maybe the real effect happens in the few months after graduation when they’re suddenly confronted with the reality of paying back loans (though CSL’s various income-contingent features should mitigate that at least somewhat). But as they head out into the workforce there’s little evidence that a preoccupation with earnings is, at present at least, a major outcome of student indebtedness.

May 17

The New York Times Swings and Misses

Sure signs of spring: baseball is back (and so is Vlad!), Ottawa is full of tulips, Quebec students are demonstrating in the buff and newspaper editors are turning their attention to student debt.

Exhibit A: the Globe’s spread on debt last Saturday (full disclosure: HESA supplied some of the data the Globe published).

Exhibit B: the cover of Sunday’s New York Times – “A Generation Hobbled by the Soaring Cost of College.”

Now, geeky wonks that we are, our first reaction to the appearance of higher education policy issues front and centre in the press gets us excited all out of proportion. And, nine times out of ten, our excitement turns to righteous indignation as soon as we read what’s written. For some inexplicable reason, journalists don’t tend to report stories the way we would want. So we eat breakfast. Outrage fades. We go on with our weekend.

But, as my insightful colleague Don Heller points out, there’s some crucial sleight of hand going on in that Times piece (and a major factual error) that, given the Times’s outsized influence, could seriously degrade the quality of public debate around higher education affordability. The Times chose to illustrate its story – which reported the average U.S. Bachelor’s-degree-holder debt (excluding those who have no debt) at $23,300 in 2011 – with the story of a hard-luck graduate of a private university marketing program with no prospects and $120,000 in debt.

Don points out the sequence of lousy decisions that have culminated in this student’s moving back in with her parents, and pinpoints how anomalous her story is. Moreover, it’s become clear that the Times misread survey data to conclude that 94% of graduates accumulate debt, when the actual figure is 62%. (The Times’s corrected the error on Wednesday.)

To its credit, the Globe chose to illustrate its piece about average student debt with a story about a graduate with… average student debt.

As we pointed out a few weeks ago, deriving meaning from the stats on student debt isn’t as obvious as it may seem. Newspaper stories that namecheck means and medians but focus on the 1% of graduates in dire straits ($120,000 in debt! “But when I graduate, I’m going to owe like $900 a month. No one told me that”!) royally undermine efforts to have a reasonable debate about access to education and student debt. By presenting the extreme as the norm, newspapers may get more hits, but they betray their public service mission.

We can surely expect better from the New York Times.

April 20

A Closer Look at Student Debt (Postscript)

While the debt burden current students and recent graduates face may not be as difficult as aggregate student debt levels might suggest, there’s one final point worth making about student debt in Canada.

As we reported, student debt levels in the 2000s increased somewhat, but not as much as you might have thought. Notably, university debt didn’t keep pace with increases in tuition, likely owing to significant federal and provincial investments in student grant programs. Yet averages tend to obscure outliers. And there’s a major outlier when it comes to Canadian student debt: the Maritimes.

As Figure 1 indicates, the four provinces with the highest average student debt in Canada and the highest incidence of debt at graduation are in Atlantic Canada (Alberta being something of an outlier as far as the proportion of students with debt goes).

Figure 1: Incidence and Average Amount of Undergraduate Debt at Graduation in 2005, by Province (in 2011 Dollars)

Source: Statistics Canada’s National Graduates Survey

Seven in ten undergraduates in Nova Scotia, Newfoundland and Labrador, and New Brunswick completed their studies with an average of more than $34,000 in student debt in 2005. Figures from the 2009 Canadian University Survey Consortium survey of graduating students make clear that debt loads in Atlantic Canada remain higher than everywhere else.

So while the “average” Canadian university student graduates with about $25,000 in debt, the situation in the east is quite different – debt loads in the four Atlantic provinces are 25% to 35% larger than those in Ontario, which is (as usual) very close to the national average. Figure 2 looks at monthly student loan repayment amounts in select provinces, using current interest rates and debt figures from 2005; it also shows the percentage of income a student would have to devote to debt servicing.

Figure 2: Average Monthly Student Loan Payments, Class of 2005, in Select Provinces, and Proportion of Before-Tax Income Required to Service Debt (in 2011 Dollars)

Source: Statistics Canada’s National Graduates Survey, 2006 Census, CSLP Repayment Calculator and Author’s Calculations

A graduate in Nova Scotia would owe $100 more per month in Canada Student Loan payments than a graduate in Ontario. Moreover, because incomes are lower in the three Maritime provinces are below the national average, students graduates there face a double whammy: they owe more in student debt and they earn less to service that debt.

Once you consider the taxes graduates have to pay, those in eastern Canada are likely to be devoting too much of their income to debt payments. As we’ve written in the past, the economists Saul Schwartz and Sandy Baum have established a sliding scale of reasonable debt payments. The average graduate with debt in Atlantic Canada – not those at the extreme end of the distribution – is pretty close to failing the Schwartz-Baum stress test. By any measure, the student debt situation in Atlantic Canada is simply dangerous.

Page 1 of 212