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.