Category Archives: student loans

April 26

A Thought for Gabriel Betancourt

In early 1918, a fellow by the name of Gabriel Betancourt was born in Medellin, Colombia. If the name sounds faintly familiar, it’s probably because of his daughter, Ingrid, the Colombia politician who was famously held captive by FARC guerrillas for six years. But in education, Gabriel is the one that matters. He’s the one who invented the idea of student loans.

To be fair, student loans weren’t entirely unheard of prior to WWII, but they were rare, and were offered by institutions themselves – Harvard’s loan program, for instance, dates back to 1840. Betancourt’s innovation was to have the state, rather than individual institutions, offer the loan. Thanks to his efforts, in 1950 the Colombian government set up ICETEX to help Colombian students finance their education, with Betancourt at the helm (he became Minister of Education a few years later).

Student loans took awhile to catch on. It was another eight years before the US government began issuing loans under the National Defence Education Act; but it wasn’t until the 1965 Higher Education Act that they became available to students in all disciplines. Japan, with its high university fees, was an early adopter, but so too were Denmark, Norway, and Sweden, who provided loans to help students with living expenses. Canada’s loans program started in 1964. The 1980s and 90s saw a large surge of new loan programs, many of which were inspired by Australia’s income-contingent model. Not all of these were well-designed, and some essentially became grant programs because of non-repayment (rule one: never implement a student loan program in a country without a credit bureau). But they continued to spread throughout Latin America, Africa, and East Asia.

Student loans often get a bad rap. But most of the criticism is misplaced, for two reasons. The first is misattribution of problems: people with high debts and low salaries aren’t in trouble because of their loans, they’re in trouble because their educational investment didn’t turn out so well. (Loss-making money managers lose money because they’re crap at stock-picking, not because they borrowed money to buy shares; the same logic applies). But more importantly, critics of loans use bad counterfactuals. The alternative to a loan isn’t usually a grant; it’s nothing at all. For millions of students around the world, loans are the only way to make education affordable and accessible – and on the whole they are remarkably successful and efficient in doing so.

Betancourt died in 2002, but tomorrow would have been his 95^th birthday. Thanks to his ideas, tens of millions of students around the world got their chance in higher education, and at a better life. If you get a chance tomorrow, raise a glass to him.

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.

March 08

The Return of Income-Contingency

The idea of income-contingent repayment (ICR) of student loans has been with us for a few decades now. In 1945, Milton Friedman advocated something like an ICR loan as a way of reducing the risk associated with educational investment. In 1971, nobel-prize winner, James Tobin, developed an ICR for use at Yale University. The first national-level ICR was in Australia, which introduced its Higher Education Contribution Scheme in 1988; the idea quickly spread to New Zealand, the UK, and Sweden. Under President Bill Clinton – who benefitted from one of those Tobin-designed loans while at Yale – ICR was added as one of four repayment options in the US Stafford Loans program.

In Canada, the idea was seriously taken-up in the early 1990s by the Council of Ontario Universities, who proposed pairing a significant increase in tuition fees with the introduction of an ICR student loan system. The explicit pairing of fee increases with student aid improvements led the Canadian Federation of Students (CFS) to oppose the idea; we ended up getting tuition hikes, but not the ICRs.

The ICR idea now appears to be having a renaissance. In one form or another, Glen Murray, Justin Trudeau, and Marc Garneau (the latter in some detail – see here) have all come out in favour of improving access to higher education via the introduction of ICR. This is all well and good, except that no one seems to have noticed that Canada’s loan system is already substantially income-contingent. It’s just that, to keep the CFS fooled, we pretend it isn’t.

The confusion arises because there’s no set definition of ICR. Australia’s ICR is universally available, has low interest rates, and is collected through the tax system; in the American ICR, none of these are true. Most of what people think of as the “good bits” of ICR could, in fact, be integrated into a non-ICR system without any difficulty. Loans don’t have to be income-contingent for Canada Revenue to collect them, and if you want subsidized interest rates, just go ahead and subsidize them. The only necessary condition for a loan to be considered income-contingent is that repayments vary somewhat with income, which is the main point of the CSLP’s existing Repayment Assistance Program (RAP).

So what do these programs actually amount to? Trudeau’s program can’t be evaluated as he hasn’t gone beyond mouthing the words “I like ICR”. Murray’s idea seems to involve eliminating parental income tests on loans (New Brunswick tried that – it didn’t go well). Garneau’s proposal – by far the best fleshed-out – essentially amounts to raising the RAP threshold, and adding loan interest subsidies. Not terrible ideas, but possibly not the most effective investment in higher education.

December 12

Islamic Student Loans

As-salaam Alaikum.

Every once in awhile, someone in the student movement hears tell of interest in Islam being prohibited, thinks about student loans for a microsecond, and then comes up with the idea that student loans are “unislamic” and, hence, culturally inappropriate. This, in the past, has led some in Canada to claim that the whole student aid system needs to be revised and made more grant-reliant, all in the name of cultural sensitivity.

This is mostly bilge, for two reasons.

The first is that there are many ways to deal with the no-interest rule. Normally, Islamic banking gets around the problem of interest by having the bank co-own an asset while the loan is being paid down (Islamic mortgages are essentially rent-to-own deals); but, that’s admittedly difficult for a student loan where there’s no hard asset against which to borrow. But a Bai’muajjal, or credit-sale arrangement, is still possible: it’s simply a loan with a fixed installment plan at the end, which gives the lender a profit. With a bit of tinkering, the US Government’s graduated repayment student loan scheme, as well as the Swedish student loan system, would both meet that test – especially since there is no profit involved. Or, one could do as Malaysia’s student loan program does and simply replace “interest” with a “fee” that works exactly the same way as interest, but preserves the form (if not the spirit) of the Sharia.

The second reason is that many muslims simply don’t care whether or not a loan is Sharia-compliant. My colleagues and I at HESA recently saw evidence of this during some work we did related to the introduction of student loans in Indonesia, the world’s largest Islamic country. We asked 2000 students in various parts of the country if they would take a student loan were it offered to them. Just over half said yes; of the remainder, 88% said that loans were a good idea for some students, but not for them personally. The main reason that this group of students did not want a loan was because they did not need one. About a quarter of all students expressed some unease about student borrowing (though the percentage who specifically mentioned Sharia as the reason was much, much smaller) – but even these students expressed little unease about borrowing, per se – and, interestingly, three quarters of those who expressed unease about student loans had no problems with the idea of a mortgage.

Though it is theoretically be possible to create Sharia-compliant student loans, the market for them is tiny, even in Islamic countries. That’s not an argument against their being offered, but it is a reason to dismiss the notion that not offering them actually represents any kind of barrier to access.

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 14

The Tools to Plan

Governments are really keen on planning as a way to improve access to education. “If only people would plan more,” goes the refrain, “people would be able to explore more options, make better financial decisions, etc., etc.” True as far as it goes; so why are governments themselves the biggest culprits in impeding good financial planning?

Say you’re a student in grade 12 deciding where to go to school next year. You’d probably like to know how your choice of institution and your decision to stay at home vs. going away will affect your aid eligibility. But despite the fact that some schools require you to apply in January, in most provinces the earliest you can apply for student aid is March (occasionally February).

Helpful, huh? Plan, plan, plan, guys – but we refuse to tell you anything about how much student aid you might receive until after you’ve made your key decision.

I’ve raised this point with student aid officials a few times over the past few years, and the response I get tends to be glassy-eyed looks as they try to imagine re-jigging the entire administrative process.

“We couldn’t do that,” they say. “Institutions only set their tuition fees for the following year in February or March” (this matters because systems currently require tuition as an input in the need assessment calculation).

“So call it an interim calculation,” I say, “and tell them that if tuition rises they can expect a bit more. Nobody ever got mad because student aid gave them more than their initial assessment.”

“But we don’t get our own budget until March. What if there’s a deficit and the government wants cuts?”

“Trickier,” I say. “But the Americans have successfully managed to deal with that problem for the last 40 years – just make sure any cuts kick in 12 months down the road. “

“That’s up to politicians, not us,” they say (not unreasonably), and then shift the conversation to other topics.

Canada is – slowly – getting better at the mechanics of student aid. In most (but not all) provinces, the electronic enrolment confirmation seems to be rolling out reasonably well, as is federal-provincial loan harmonization/integration. But on the issue of need assessment timing, we just can’t seem to get past the idea that programs should be run for the convenience of governments rather than the needs of students. If American students can get their need assessment done 12 months in advance, there’s no reason other than a lack of imagination why ours shouldn’t be able to as well.

After all, if we’re going to hector students about financial planning, the least we could do is actually give them the information they most need.

January 04

A Harper-ized Canada Student Loans Program

I rarely say this about a Jane Taber article, but her Christmas Eve piece on Prime Minister Harper’s stewarding of federal-provincial relations was mildly fascinating. Her thesis is that Harper is gradually starting to impose his vision of water-tight federalism and has a long-term plan to get the federal government to back off and let provinces get on with doing whatever they are supposed to do under Article 92 of the Constitution.

So, what’s the impact on higher education? I doubt there’s reason to worry about the federal commitment to research – Harper’s attachment to the innovation agenda seems reasonably strong though it’s possible the budget review might have some nasty surprises for SSHRC. The government’s commitment to keeping 25% of the Canada Social Transfer notionally “reserved” for education is also probably safe (to the extent that matters in the slightest).

But student loans are another story altogether; it’s not outside the realm of possibility that these could see a major shake-up over the next four years. For starters, they are after all the ultimate fed-prov governance nightmare. Part-federal, part-provincial, each clutching their own portion of the program so tightly that integrated communications programs that students can actually understand remain a challenge even after 47 years in operation.

Then there’s the fact that there’s an enormous amount of equalization built into the program, which always seems to irk the Tories. Per capita, students out east are getting substantially more aid than students in Ontario and the west because of higher borrowing rates (since default rates are also higher, that aid also costs more).

What might a Harper-ized student aid system look like? It would be relatively easy to change the program into a system of block-transfers to provinces, and one could do so without doing violence to the principles of CSLP providing provinces agreed to three simple principles in return:

- a common need assessment system to ensure equal treatment for students across the country
- all student aid to be portable to ensure mobility
- visibility for the federal government’s contribution (OSAP to become COSAP, for instance)

In return for just those three commitments, Harper and co. could get out of the business of handling student loans and just cut big cheques to the provinces who in turn will use the money to create simpler, integrated programs that are easier to understand, that work for students and that align with local political priorities. And in a number of ways, the system would be better than the one we have now.

It probably won’t happen; Harper’s not aching for a largely symbolic fight about education and fiscal federalism. But don’t rule it out.

December 15

Affordable Enough?

“Everybody knows” that student debt loads are spiralling out of control, that the incidence of debt is growing at an alarming rate and that debt loads are unsustainable. Student debt forgiveness has played a major role in the Occupy movement in the United States, where student debt doubled in the last decade and now exceeds credit card debt. If reports are to be believed, we are in the midst of a student loan crisis.

Scratch the surface a little and you’ll see that the situation in Canada is hardly like that in the U.S. According to the most recent data on student debt, which unfortunately dates from the Canadian University Survey Consortium’s 2009 Graduating Student Survey, debt increased at a relatively small pace between 2000 and 2009, from just under $25,000 in 2000 to just under $27,000 in 2009 – 9% after inflation. No small amount to be sure, but keep in mind that tuition grew at a faster pace, by 14%, according to Statistics Canada during the same time period. Moreover, the proportion of undergraduates reporting debt increased by a mere two percentage points, from 56% to 58%.

While, in fact, student grant and loan remission programs are holding the line on debt, there remain concerns about the long-term manageability of debt loads; we’ve never really had a strong measure of the impact of student debt on a graduate’s financial decisions.

How much debt can students reasonably afford to take on in pursuit of post-secondary education? In a neat little paper for the College Board, Carleton’s Saul Schwartz and Skidmore College’s Sandy Baum, who combined have studied the issue of student debt from every conceivable angle, attempt to define benchmarks for student debt affordability (the pair worked on a Canadian version reaching similar conclusions). They conclude that what really matters isn’t the debt load, per se, but the proportion of income a graduate must devote to student loan repayment. They argue for a sliding scale of repayment, ranging from no payments for those earning $10,000 or less to a maximum of 18% of discretionary income (i.e., that which exceeds 150% of the poverty line) for those earning $150,000. Sound familiar? That’s because it served as the rationale for the parameters of the Repayment Assistance Plan administered by the Canada Student Loans Program and its provincial counterparts, which caps maximum payments at 20% of income and allows students to discharge outstanding debt after 15 years of repayment.

Coming off of a decade where student aid programs kept debt increases below the rise in tuition, Canadian students who do struggle after graduation have access to comprehensive repayment assistance. And yet, access to higher education remains titled in favour of those from wealthy, highly educated backgrounds. Tweaking student aid or adjusting the net cost of higher education is unlikely to produce huge gains in access; it will take serious efforts to address the academic, informational, cultural, motivational and aspirational barriers to higher education. Unfortunately, that’s a lot to fit on a placard.

A longer version of this article is included in the recent edition of Educated Solutions, put out by the Ontario Undergraduate Student Alliance.

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