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.
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Perhaps the quibble might be the threshold for RAP. And, if I’m not mistaken, wasn’t there some form of loan forgiveness at some point? On that, I’m not sure. If I’m not mistaken, the income is calculated per household, not individual, so if you have a spouse eking by on a 45k p.a. while you are earning zip to below the threshold, no RAP. The lesson here might be not to get married before or during the repayment period.
Of course, the NSLC system is much nicer now than it was in my student days. Back then, the loans I accumulated were through two systems: the bank and then they got out of the racket and in came the NSLC, to the tune of about 3 years each. And when repayment time came, I was lucky that prime was being slashed down to a nub, which meant implementing a personal program of overpayment, about a grand a month to all four, then three, and then two, until just one loan remained, at each phase just shifting the same one grand per month payment to the remaining loans. I still hold to the view that the dumbest thing a grad can do is to skimp on repayment and put extra cash into investments.
One former student asked me if it was smart to pay off the loan by taking out a loan to pay it. Err, no. First of all, banks don’t have a version of a RAP. Secondly, good luck securing that loan if you have zero collateral because, technically, a student loan sits on your credit bureau as insecure debt; i.e., there’s nothing to repossess here… It’s not as if they can take away your degree.
I have to share this semi-amusing anecdote: back in 1999, a recently graduated student from law school was now being asked to repay his substantial student loan. He issued a cheque for fifty bucks, and in the memo field he wrote, “for the settlement of the entirety of the loan.” They cashed it, and asked for more. He replied, “the cheque is, in fact, a form of contract, and by cashing it you agreed to its terms listed thereon.” He didn’t get away with it, but it was a clever attempt to dodge repayment.
It’s not called income contingency, Alex, because it isn’t income contingency. The RAP offers virtually no option for paying back less than you borrowed. What it actually does is extend the interest-free period in six-month chunks and, if you’re on it for long enough, it re-amortizes your loan over a longer period of time (15 years! what joy for those who are low-income!). In the end, the best most people can hope for, if you’re consistently living at the poverty line, is only paying back the principal of the loan. For those who are granted some relief on the principal, they are barred from taking on any other student loans until all of their remaining loans are paid off. So if you want to go back to school to re-skill because the job you’ve trained for has been made redundant by changing industry realities (hello, Windsor!), but have hit stage 2 of the RAP, you’re stuck either until you’ve paid it all off or hit the 15-year mark, whichever comes first.
I suppose you could always default on your loan and refuse to acknowledge the debt for six years, if you live anywhere other than Ontario, and throw your credit rating in the dumps for a decade. Some might also consider that an income-contingent plan.
I’m surprised that you cited the UK and Australia, given that in both cases, tuition fees did skyrocket and governments and administrators have used the arguments that there are income-contingent loan repayment schemes to justify such increases. And notwithstanding the impact that these increases and increased debts have on individuals and their families/communities, there has been a shocking impact on the national budget.
The UK National Audit Office put current outstanding student debt at over £46 billion, with the public writing off over £5 billion in student loans that are unaccounted for. It is expected that the Ministry of Business, Innovation, and Skills will have to spend an additional £600 million to make up for unanticipated student loan defaults and subsidies. That all seems like a pretty big failure, all things considered. And if the goal is to get rich people to pay more than everyone else, why not rely on the income tax system, which already exists, requires no new funds to administer, contributes directly to the coffers that fund education, and (arguably) adequately reflects what people can actually pay?
For someone who seems to support the elimination of redundancies and waste, I’m surprised that you’d back such a convoluted and complex program.
(And for more info on the UK example, see: http://www.ibtimes.co.uk/student-loan-bis-slc-graduates-debt-money-525842)
Not clear why you think “an option for repaying less than full value of the loan” is part of the definition of income-contingency. The US ICR option has no such provision. Neither does the Australian one, as far as i can recall, nor did the Swedish ICR that existed in the 1990s. Nor am I clear how you read the article as an endorsement of the UK system. It wasn’t.