There’s a trope out there that goes something like this: “Loans are unfair because interest on the loans means that needy students pay more in total to go to school than students who don’t need a loan“. If it were true, this would indeed be problematic. But the thing is, for the most part, it’s not.
Let’s follow two hypothetical students: Claudia and Eveline. Claudia can manage to pay $25,000 for her four years of tuition, upfront; Eveline cannot, and she borrows $25K from Canada Student Loans and her provincial student aid program over four years. Assume that inflation is a constant 2%, and that interest during the repayment period is 6.25% (over the last few years, real interest rates have floated between 400 and 450 basis points above inflation).
Student loans carry zero interest during the in-study period. This means students actually make money while they’re borrowing because inflation eats away at the value of the loan before they’re required to pay it back. In Eveline’s case, she effectively makes $1,125 between the September she starts and graduation day.
Then, of course, things start to work in the other direction. Assuming Eveline takes eight years to pay off her student loan, she ends up making $4,321 in interest payments (figure is net of inflation). Take away the $1,125 that Eveline “made” during the in-study period and the net interest cost comes to $3,196.
If that were the end of the story, the people who claim loans are “unfair” would be right; we would be discriminating against the poor. But that’s not the end of the story because people who get loans usually also get grants.
If you’re an independent student making less than $38K per year and you apply for aid, you are nailed-on for an extra $2,000 per year – that’s $8,000 over the course of a degree. Ditto if you’re a dependent student and your parents make less than $38K. If you’re a dependent student and your parents make less than (roughly) $76K, you’re nailed-on for another $800/month – or exactly $3,200 over four years, which wipes out the interest cost of the loan. Plus, of course, you get 15% of all interest paid as a tax credit – which means you actually come out ahead by a few hundred dollars.
Are there borrowers who don’t come out ahead? Yes. Those who borrowed but had family income high enough that they didn’t qualify for the middle-income grant likely wouldn’t receive a grant to offset the loan interest amount. Borrowers who take more than eight years might end up with higher interest charges not covered by their grants (and possible remission). There are enough variables here that it’s hard to say how many people this might include. But remember – the base population that doesn’t get sufficient offsetting grants consists of dependent students with family incomes over $80K, that’s *maybe* 20% of all borrowers (and not the poorest 20% by any means). Or to put it another way: probably something like 80% of borrowers are receiving more in subsidies than they pay in real interest over the life of their loan.
That’s a good thing – an outcome of our generous, if opaque, student aid system. We should acknowledge it, celebrate it, and most of all get the usual suspects who adore this talking point to shut up about it.
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There is also the opportunity cost of the $25,000 that Claudia is using to pay her tuition. Claudia is giving up the return that she could have earned on that money if she borrowed the tuition funds, interest free, from the student financial aid program. So the calculations above understate the subsidy to student loan borrowers.
But I can understand why you might want to ignore Claudia’s opportunity cost in the analysis. In my experience, including something like opportunity costs, though correct and real, somehow seems to make the argument less convincing to many.
First of all, a trope is a figure of speech, like “straw man argument” or “mountain of debt.” I’m not sure what to make of an argument that begins with such a confusion of terms and then proceeds to a lot of fictional math peppered with such phrases as “probably something like,” but the debate around this issue is much more complex than is being suggested here.
Two key points in the larger discussion:
a) the high cost of university is keeping highly qualified students out of a system (educational, economic) that would benefit from their talents, or minimizing what they can take from it because they’re working so many hours to pay the bills that they don’t have sufficient time for their studies (note: I worked 30hrs/week during most of undergrad, when tuition was less than a third what it is now);
b) the high cost of university has significantly increased the total student debt across the country, to the profit of the loan holders, while universities continue to be relatively cash-starved in the classroom: dilapidated facilities, part-time instead of full-time teaching staff, and so on. In other words, high tuition isn’t solving the budget crisis in universities and is feeding the banks’ (and their shareholders) profit margins. We have, in short, transformed the economics of education so that instead of the richest subsidizing education through taxes to serve the general interest of the country in a well-educated workforce, as was the case until about 20 years ago, we now have the richest earning higher dividends and justifying it with the argument that education only serves the personal interest, and bottom line, of the individuals who are educated. I don’t want the richest kid being my doctor–I want the smartest, most compassionate and dedicated kid, regardless of economic background.
c) one of the contributing factors to the problems in higher education these days has nothing to do with tuition and everything to do with institutions scrambling to make up for the loss in public funding–by shifting resources to fundraising, e.g., and so hiring more and more staff and upper admin whose main jobs are just trying to hunt for money. This is taking attention off the classroom and onto visible, marketable projects that are deemed to look good to potential donors–buildings that can have a name put on them, research that serves short-term industrial needs, etc. Until we can put a sticker on students’ foreheads that reads, “Funded by [Corporation],” the educational mission will continue to be ill-served by this transformation in university funding. And no, I’m not suggesting that we should put stickers on students’ foreheads. That was irony–also a trope.
Hi Julia. Thanks for commenting. My response would be:
a) I would simply point out that participation rates have risen substantially over the last few years – indeed, double where it was 25 years ago when tuition was less than half of what it is now. No doubt, there are still some deterred by fees. But if this were a major issue, we would not have seen rising participation.
b) The stratification of the student body has not changed substantially over time. Therefore it cannot be that the rich used to pay for the poor and now they don’t. Whoever has been paying the taxes is still paying for the same distribution of beneficiaries -just more of them.
c) Your information on “loss of public funding” is simply wrong Government funding to universities is up enormously in the past 15 years. Even in per-student, inflation adjusted terms. https://higheredstrategy.com/financing-canadian-universities-a-curious-story-part-1/. We’ve seen a very slight decrease over the past four years, but it is still significantly above even where it was ten years ago.
Hi Alex,
I’d love to see this data–it doesn’t square at all with what we’re seeing on the ground (I’ve worked at four universities in three different provinces), or what we’re hearing from university administrations. Your chart (in the link you provide), for instance, doesn’t distinguish between kinds of government support–federal dollars for research have gone up, e.g., at least partly because rates of corporate support for research are much lower in Canada than other Western countries, but support for *education* has not kept pace with increased costs (e.g., digital resources, wifi and computer stations across campuses, in addition to the usual instructors, support staff, and heating buildings), increased student numbers, and so on.
Re: b) the rich didn’t used to pay for the poor. Taxpayers used to support the principle of a good education for everyone who had the aptitude and the commitment; this is why the Tories in Ontario built so many new universities in the post-WWII era, and why many provinces used to offer *interest-free* student loans. Banks took those over about the same time that tuition started to go up at a significant rate–because it served the profit motive. Now skyrocketing tuition (while class sizes have gone up and numbers of full-time faculty have, in some sectors at least, gone down sharply, along with basic library resources and quality classroom space) has greatly increased the total student loans in the country. The question I’m posing here isn’t about paying interest (your argument)–but who *gets* the interest (see http://www.theguardian.com/education/2014/sep/30/tuition-fees-bonanza-for-one-per-cent-danny-dorling?CMP=twt_gu for an analysis of this trend in the UK). Corporations and high-end taxpayers are paying less for education and for research, while expecting to yield greater material gains from the little that they do pay. Students’ educational interests aren’t a priority in this model.