As we saw yesterday, while student debt at graduation has been increasing, falling interest rates have meant that monthly student debt payments have made up a smaller share of a graduate’s income in recent years.

Of course means and medians only tell part of the story. While it may be true that the average borrower was better off in 2007 than in 2002 despite graduating with more debt, the same can’t be said for every borrower. As Figure 1 points out, the proportion of graduates reporting difficulty repaying their loans has hovered around 30% since 1997. It’s worth noting that the federal government expanded interest relief programs in the 1998 budget as part of a series of measures to tackle student debt. Since debt burdens have been declining in recent years, it’s unlikely the situation has worsened.

Figure 1: Percentage of Graduates Reporting Difficulties in Repayment Two Years after Graduating by Type of Degree, 1988 to 2007

Source: Statistics Canada’s National Graduates Survey

A ten-year retrospective on the graduating class of Canada Student Loan borrowers from 1995 offers two important insights. First, graduates who encounter challenges repaying their loans tend to do so soon after finishing school; 90% of defaults occurred within three years of graduation. Second, default (i.e., when students miss three payments or more) tracks graduate income, not indebtedness. While the debt load of students who defaulted was similar to that of students who did not, their income was much lower.

So where should student aid policymakers address their attention? As we’ve seen, rising debt levels can be more than offset by relatively low interest rates. But if interest rates rise, especially quickly, graduates may find themselves in trouble. Enter programs like the federal Repayment Assistance Program, which sets payments on the basis of income (not outstanding debt), capped at 20% of the individual’s family income, and discharges debt after 15 years (10 for those with permanent disabilities).

Unfortunately, borrowers must apply for RAP, meaning they must be aware of it. A 2006 paper looking at the CSLP’s interest relief program found that only 45% of eligible beneficiaries of interest relief took advantage of the program. In particular, borrowers on social assistance and with large families (i.e., those unlikely to have family members who can pay their bills) were relatively unlikely to apply for support.

As my colleagues have noted, the current student aid system works well because interest rates are low. A hike in rates, though perhaps not imminent, could raise the debt burden and cause government expenditure to balloon, upsetting the careful balance that currently exists.