Higher Education Strategy Associates

Student Aid through the Looking Glass

On the heels of Statistics Canada’s annual overview of tuition fee increases across the country (which unfortunately fails to take into account Pauline Marois’s imminen cancellation of the $254 tuition hike in Quebec), it’s worth considering something that everyone involved in student aid policy needs to come to grips with: that there is a significant fraction of student aid recipients who are better off when tuition rises, and worse off when tuition falls.

I’m not making this up. Here’s how it happens:

When students apply for aid, their need is calculated by subtracting their assessed resources from their assessed costs (gory details on need assessment available here, if you’re interested). If the resulting figure is positive the student is eligible for a loan, and if it is sufficiently high the student becomes eligible either for a grant or loan remission payment (which is essentially the same thing). The exact threshold when aid switches from loan to grant differs by province, but the principle is the same across the country. Eventually, (again, the exact threshold varies by province) grants max out and students start having “unmet need.”

When tuition rises by $1, ceteris paribus, need rises by $1 as well. For students with just a little bit of need, that means loans rise by a dollar. But for those students with need high enough to qualify for grants but who have not yet maxed out their aid, a $1 rise in tuition means a $1 rise in grants. In other words, a tuition hike merely triggers an exactly offsetting amount of grant aid.

Here’s where it gets interesting. For every dollar Canadians spend in tuition, they receive a non-refundable tax credit, which can be transferred to a parent or carried forward to another tax year. Depending on the provincial tax rate in the province, a rise of $1 in tuition means an increase in the tax credit of between 21 and 35 cents. For students who are not receiving grants or have maxed them out, this means a $1 tuition hike is really just a 65- to 79-cent hike. But those students eligible for grants are actually up on the deal: they get both the offsetting grant dollar and the tax credit. Conversely, if the government reduces tuition by $1, they are worse off because they lose both the dollar in grants and the 21- to 35-cent tax benefit.

All told, this seriously goofy situation probably affects a little over a quarter of all students receiving aid in Canada. It’s a real policy problem. These are the students governments should most want to help, but when they do so with poorly thought-out populist measures like tuition roll-backs (as happened last decade in Manitoba, Newfoundland and P.E.I.), they actually leave these students worse off.

Pure intentions are no substitute for serious policy analysis. In student aid, the quick fix is nearly always wrong.

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One Response to Student Aid through the Looking Glass

  1. Connie Gibbs says:

    In BC there is neither grant nor loan remission for fulltime students enrolled in programs less than two years in length.

    The nonrefundable tax credits mentioned are of dubious benefit to students who have little income to apply them to . It might benefit their parents but I wonder how many of these tax credits are actually transferred/used? They can be used once the student graduates and starts earning but again, that is not much help during the lean student years.

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