BP-460E
FINANCING UNIVERSITY
EDUCATION
IN CANADA
Prepared by:
Rose Pelletier, Terrence J. Thomas
Economics Division
May 1998
TABLE OF CONTENTS
INTRODUCTION
THE RISING COST OF UNIVERSITY
EDUCATION
STUDENT
LOANS
A. Canada Student Loans Program (CSLP)
B. Ontario Student Assistance
Program (OSAP)
C. Programme de prêts et
bourses du Québec
THE ROLE OF FINANCIAL INSTITUTIONS
STUDENT INDEBTEDNESS
A. Magnitude of Student Indebtedness
B. Effects of Student Indebtedness
C. Government
Solutions to Canadian Student Indebtedness
1. Canada Student Loans Program (CSLP)
2. Ontario Student Assistance
Program (OSAP)
3. Programme de prêts et
bourses du Québec
RELATED
ISSUES
A. Reports of Committees
B. The 1998 Budget
C. Income Contingent Repayment
Loans Schemes
CONCLUSIONS
BIBLIOGRAPHY
FINANCING UNIVERSITY EDUCATION
IN CANADA
INTRODUCTION
In recent months, the phrase "crisis
in education" has appeared often in newspapers and magazines and on radio and
television. The phrase has been used in the context of government funding to education,
rising tuition at most Canadian universities, and increased debt loads for students and
recent graduates. It is useful to go beyond the phrase to quantify recent developments and
to speculate about their short-run and long-run effects.
Although funding cuts affect all levels of
education, this paper will concentrate on their impact on postsecondary education in
Canada. Since the recent surge in tuition fees has given student loans more prominence,
this paper examines the federal program and two representative provincial student loan
programs and notes the increasing role of financial institutions in these. The central
section of the paper gives the available data on the extent and nature of student
indebtedness and discusses some of its apparent effects. Related issues discussed in this
paper include the reports of two parliamentary committees, a recent federal education
initiative and a possible alternative to the current system of student loans.
THE RISING COST OF UNIVERSITY EDUCATION
At the end of August 1997, Statistics
Canada released the article "University Tuition Fees, 1997/98" in The Daily,
showing that the cost of university tuition was increasing much faster than the rate of
inflation. Fees for undergraduate arts students (a long-standing proxy for the general
level of university tuition) had increased by almost 9% in Canada from the 1996-97
academic year. This percentage is the average across Canada; as the following table shows,
changes in tuition costs varied widely among provinces, from no change in Quebec to a
change of 18% in Newfoundland.
Source: Statistics Canada,
"University Tuition Fees, 1997/98," The Daily, 25 August 1997. Fees
shown are in dollars and are an average of the universities in each province with the fees
weighted by the number of students.
Tuition, of course, is only part of the
cost of higher education. Additional fees can add up to several hundred dollars. At the
University of Toronto, for example, such fees for an undergraduate arts student would run
from $133 to $467 (or 4.1 to 14.6% of the University of Torontos $3,196 tuition --
all figures based on Statistic Canada's recent release). The costs of room and board for
those who cannot attend a local university (or choose not to) are higher than tuition
fees. Total expenses for attending the University of Toronto for the 1997-98 academic year
range from $8,328 to $10,940; the U of T is admittedly in one of Canada's most expensive
cities, but average total expenses across Canada are probably in the $7,000 to $8,000
range.
With respect to tuition fees, as shown in
the table above, Quebec stands out, both for its low level of tuition costs and for having
had no increase in such costs since the 1996-97 academic year. The tuition figure shown is
for provincial residents; those from outside Quebec pay higher course fees, bringing the
cost of their education in Quebec into line with tuition charges at universities in other
provinces. With the exception of Quebec and British Columbia, which had a relatively
modest increase in tuition, universities in Canada had tuition increases far in excess of
the current inflation rate of under 2%.
The Statistics Canada study noted that
tuition fees have outpaced the rate of inflation in all provinces since the mid-1980s.
Tuition fees have more than doubled while the consumer price index (CPI) has increased by
37% (because of limited data, the comparison was for the period 1985-86 to 1995-96). Some
commentators have wondered, however, whether the real cost of tuition is so far different
from what it was in (say) the mid- or late-1960s. The phrase "crisis in
education" could prove to be an overstatement if it could be shown that earlier
students and their families managed to pay tuition costs that were higher in real terms
than they are now.
Chart 1 provides a historical
perspective on tuition movements since the mid-1960s. Three series are shown in the chart:
average tuition for full-time Canadian undergraduates in the Arts and Sciences in nominal
terms, the consumer price index (CPI) and real tuition costs (the nominal series divided
by the CPI). Each of the three is shown as an index with 1965=1.0.
Most noticeable in the chart, perhaps, is
the surge in tuition costs over the past few years. Other facts are worth mentioning,
however. Inflation was relatively flat during the earliest and latest years covered; the
high inflation during the 1970s and 1980s also stands out. It is possible to discern three
sub-periods of movement in tuition relative to inflation. From the mid-1960s to the late
1970s, tuition stayed relatively flat, almost immune to changes in prices. Throughout the
1980s, tuition changes were somewhat in line with price changes, as if universities (or
whoever set tuition fees) were trying to maintain the real revenue from tuition. From the
late 1980s, the price of tuition has moved up faster than prices. Of most interest in the
chart is the movement of real tuition costs. It is only in the mid-1990s that real tuition
costs -- one measure of the burden of tuition on students and their families -- reached
the level of the mid-1960s.
The saucer-shaped curve for real tuition
may, however, give a misleading impression of the burden of recent tuition increases,
since real incomes are higher now than they were in the mid-sixties. According to
Statistics Canadas surveys on income, real family income was 62% higher in 1995, the
year when real tuition reached its mid-sixties level, than it was in 1965. That is, the
real burden of tuition, relative to family income, is lower today than it was in the
1960s. Comparing 1995 to a year in the mid-1970s would give a different picture, as real
family income has been relatively flat since then. The distribution of family income is
also important. If most students in the mid-1960s came from families with "high"
incomes (high relative to the family incomes of todays students), a comparison using
average family income would understate the real overall burden of tuition today.
Another way of looking at tuition changes
is to explore how revenue from tuition has changed as a source of funds for universities.
Chart 2 uses the available data for the period 1971-72 to 1995-96 to show the ratio of
tuition fees to operating revenues. This ratio declined from its early 1970s value of
around 18% and did not regain this level until the early 1990s. By the 1995-96 academic
year, the ratio had reached 25.6%. Note that the series used in this chart is the
aggregate dollar amount for tuition fees at Canadian universities. The tuition series here
reflects both changes in tuition fees and changes in enrolment. Despite the different
definitions, both charts illustrate universities increased reliance on tuition.
STUDENT
LOANS
Postsecondary students have various
sources of funds for their education: family income (parents, spouse, grandparents), wages
from work or any other personal income source, scholarships, loans from the bank and
grants and loans from the government. It is the loans from government that have attracted
the most attention, as these loans can reflect government policy on education.
In Canada, the federal and provincial
governments provide financial assistance (loans and/or non-repayable grants) to eligible
students based on their demonstrated financial need. The needy students of all the
provinces except Quebec and the Northwest Territories may apply for both federal and
provincial assistance, using one form to do so. Quebec and the Northwest Territories have
opted out of the Canada Student Loans Program (CSLP) and receive compensation from the
federal government based on the costs of their own student assistance programs.
The loan programs take into consideration
any contribution from family and income from work during the four months before the
beginning of the studies; that is, all the resources available to the student and the cost
of his or her studies are calculated. The next section describes the Canada Student Loans
Program (CSLP) and the Ontario Student Assistance Program (OSAP), which was chosen to
represent provincial programs in all those provinces with CSLP. A description of the
Programme de prêts et bourses du Québec is also given.
A. Canada Student Loans Program (CSLP)
In 1994, there were a number of
modifications to the CSLP program, which was renamed the "New CSLP." Table 2
compares the two versions of CSLP.
The New CSLP provides for up to 60% of the
assessed needs of the student up to a weekly loan limit of $165. During full-time studies,
the student does not make payments on the loans and the interest is paid by the
government. Six months after the end of their studies, the students are required to begin
to repay the loan. Participating provinces determine how much assistance they themselves
will provide in loans and/or grants.
(a) While the student is in school and the
government is paying the interest, a loan is classified as class A. Once the borrower
leaves school and must assume responsibility for payment of interest, the loan is
classified as class B.
(b) The practice of using Revenue Canada to recover debts from refunds due is a recent
change; it was not in place for most of CSLP history.
(c) But this practice may continue in a limited way under the new CSLP.
Source: Harry Hassanwalia,
"Improvements to the Canada Student Loans Program: Do Recent Changes Fit the
Bill?" in Ross Finnie and Saul Schwartz, "Student Loans in Canada. Past, Present
and Future." C.D. Howe Institute, Toronto, 1996, and Library of Parliament.
For part-time students, there is also the
possibility of a loan of up to $4,000, on which interest must be paid by the student
during his or her studies. Canada Student Loans are issued by and repaid to participating
lenders. There is a program of interest relief for students who experience financial
difficulties after their studies. Some provinces provide additional assistance, in the
form of loan remission or loan forgiveness, to borrowers repaying provincial student
loans.
Federal assistance also includes Special
Opportunity Grants for students with permanent disabilities (up to $3,000 per year),
high-need part-time students (up to $1,200 per year) and female doctoral students in
certain fields of study (up to $3,000 per year for up to three years).
Until 1990-91, almost all the provinces
gave needy students some form of grant or bursary. By 1994-95, most of these aid packages
had been eliminated, leaving only loans. Some provinces were more affected than others. In
Ontario before 1993-94, needy students were first given a provincial grant and then a
federal loan; a provincial loan was then offered if still more was needed to match the
assessed need. In 1993-94, the grant program was abolished, however, making the CSLP loan
the first type of aid offered to the student. The main exception to this situation is
British Columbia; here the grants programs were maintained, with the result that the
amount borrowed by students rose only moderately.
Government financial assistance to
students is thus a combination of federal and provincial packages. Table 3 shows the
federal and provincial student assistance for the years 1990-91 and 1994-95.
(a) Omitting Quebec and the Northwest
Territories.
Source: Ross Finnie and Saul Schwartz, "Student
Loans in Canada. Past, Present and Future," C.D. Howe Institute, Toronto, 1996.
B. Ontario Student Assistance Program
(OSAP)
OSAP includes both federally and
provincially funded loan programs that provide financial assistance to eligible
postsecondary students. The Government of Ontario funds the Student Loans Plan and the
Ontario Special Bursary Plan (OSBP). The latter is a student assistance program that
offers non-repayable bursary assistance to help cover the educational expenses of
part-time and full-time postsecondary students with a low family income. In addition,
there are the Ontario Work Study Plan, which is a special program giving students a chance
to get part-time jobs on campus; the Child-Care Bursary Plan, which offers help for
students with three or more children; and the Bursary for Students with Disabilities.
Finally, there is the Loan Forgiveness Program (for students receiving loans through
OSAP); and the Interest Relief Program, which is for Ontario Student Loans only.
C. Programme de prêts et bourses du
Québec
The Programme de prêts et bourses du
Québec provides financial aid to postsecondary students and those receiving secondary
school job training. The calculation of allowed expenses includes tuition fees,
subsistence, and transportation costs as well as expenses for children, some medical
expenses and the interest on computers bought under the Loan Program for the Purchase of a
Computer. The revenues of the student are also taken into account, as is the contribution
of his or her parents and/or spouse if applicable. The difference between income and costs
is provided in loans up to a certain amount and the rest is provided through grants.
THE ROLE OF FINANCIAL INSTITUTIONS
In all governmental programs offering
funding to needy students, financial institutions play an important role. This role has
grown in recent years, especially with respect to the CSLP.
In June 1994, the federal government
adopted Bill C-28, which gave financial institutions broader responsibilities in the area
of student financial assistance. Since then, the government has ceased to guarantee
student loans; instead, it pays a 5% risk premium to participating lenders, who agree to
provide student loans. There are now nine lenders, which are required to disburse loans
promptly within a specified period of time, provide service in both official languages,
have toll-free telephone enquiry lines, give written notice and annual statements to
borrowers who are repaying the loan, and offer financial counselling.
The government still decides on the amount
of the loan for each applicant; the financial institutions do not take part in the
decision process. The interest on the loans is paid by the government while the student is
in school and, after six months following the period of studies, the student must begin to
pay the interest and repay the outstanding capital. This reimbursement is negotiated
between the student and the financial institution. Borrowers who were full-time students
have the option of fixed interest rates of prime plus up to 5% or floating rates of prime
plus up to 2.5%.
STUDENT INDEBTEDNESS
With the recent increases in tuition fees
at most Canadian universities and the shift of some government assistance from grants to
loans, student indebtedness has risen. This section looks at various aspects of student
indebtedness. Some of the tables, unfortunately, rely on data from the late 1980s or early
1990s, and may thus understate the increasing burden of student debt in recent years.
A. Magnitude of Student Indebtedness
Table 4 shows the distribution of full-time student loans
by indebtedness for the period 1992-93 to 1995-96. Note that there is a general upward
trend over the years for each category of indebtedness and thus in the total.
Source: Human Resources Development Canada, 1994-95
and 1997-98 Estimates Part III.
Table 5 shows the number and the
percentage of student loans in default by loan amount for the period 1989-90 to 1992-93.
Note that, in total, the number of loans in default was lower in 1992-93 than in 1989-90.
Also, the average value of claims paid went up over that period.
Source: Bernard Bourgouin,
"Financial Assistance to Postsecondary Students," In Statistics Canada,
"Education Quarterly Review," Publication No. 81-003 Quarterly, Spring
1995, Vol. 2, No. 1.
Table 6 shows the number of
bankruptcies declared by CSLP recipients; this number in 1995-96 was more than twice that
in 1990-91. The number of bankruptcies is growing very fast and this growth has become an
important concern for lenders and government policymakers.
Source: Government of Canada, Human
Resources Development Canada, Learning and Literacy Directorate.
Source: Canadian Federation of Students, "A
Blueprint for Access, A Strategy for Change," Canada, 4th ed. 1997.
The following tables are based on data
from the National Graduates Surveys. Table 7 shows the incidence of student borrowing and
the mean amounts owed at graduation by gender. The data in Tables 7 and 8 are
unfortunately not recent; information from the 1998 Budget suggests that average student
debt next year will be about $25,000. The fact that the numbers are quite similar for men
and women is interesting, because men usually earn more than women. The incidence of
borrowing for college/CEGEP and BA students has grown over time, while it has remained
stable for MA students and decreased for PhD students. However, the mean amount borrowed
has increased for all types of students.
Source: Ross Finnie and Saul Schwartz. "Student
Loans in Canada. Past, Present and Future," C.D. Howe Institute, Toronto, 1996.
The debt-to-earnings ratios, shown in
Table 8, are increasing for all types of students, with the biggest increase (roughly
double) for those graduating with a bachelors degree. Also, except for PhD
graduates, the burden is heavier for women than for men; this might have been expected
since, as explained above, men usually earn more than women. Note, however, that the
burden decreases as the level of the degree rises.
(a) Defined as the amount owed to student loans
programs at graduation divided by annual earnings in the job held at the first interview.
Source: Ross Finnie and Saul Schwartz. "Student
Loans in Canada. Past, Present and Future," C.D. Howe Institute, Toronto, 1996.
Table 9 presents the reasons for
difficulties in repaying loans, as reported by students in interviews. The interesting
fact here is that high debt load was not said to be the most important factor; rather,
this was said to be unemployment or insufficient earnings.
(a) Too few observations to be reported.
Note: Data for those with student debt (government
or otherwise) still outstanding at the first interview, two years after graduation. The
rows add up to more than 100% because individuals may have indicated multiple causes.
Source: Ross Finnie and Saul Schwartz. "Student
Loans in Canada. Past, Present and Future," C.D. Howe Institute, Toronto, 1996.
Part of the default problem under the Old
CSLP seemed to stem from certain features of the program (Finnie and Schwartz (1996).
First, defaulting on a student loan could not affect a borrowers credit rating,
since CSLP regulations forbade the release of this information to a credit bureau. Second,
the relatively small size of student loans and their below-market interest rates gave the
banks less incentive to pursue repayment. Finally, the repayment terms were quite rigid.
Most students faced a standard repayment period and payments set only by the extent of
their borrowing.
B.
Effects of Student Indebtedness
Table 10 presents the education
decisions taken by students after obtaining their first and second degrees. The numbers
show that those who had obtained a masters degree by 1988 had had a much lower
incidence of borrowing at the bachelors level.(1)
The relationship is similar for those who obtained a masters degree by 1991. The
same pattern holds for the masters graduates who went on to obtain a PhD by 1988.
(The situation is not so clear for those who received their PhD by 1991, but as Finnie and
Schartz (1996) have pointed out, since there were fewer of these individuals, the
situation of those who received their PhD by 1988 is more significant.)
Finnie and Schwartz mentioned three
reasons for the fact that those who went on to higher studies borrowed less than others at
the earlier stages. First, continuing students are generally the better students and they
were therefore more likely to receive bursaries or scholarships, thereby reducing their
demand and eligibility for loans. Second, individuals from families with high incomes have
less need for loans, should not be eligible for loans and are more likely to go on to
higher levels of studies. Third, the fear of high levels of accumulated debt may have
deterred some individuals from continuing their studies.
(a) Constant 1990 dollars.
(b) Individuals may have been enrolled in, but did not receive, a higher degree
after graduation in 1986.
Source: Ross Finnie and Saul
Schwartz. "Student Loans in Canada. Past, Present and Future," C.D. Howe
Institute, Toronto, 1996.
C. Government Solutions
to Canadian Student Indebtedness
There has long been pressure on
governments to do something about the burden of student debt. As policies differ according
to the program and level of government, the discussion below is under the following
headings: Canada Student Loans Program (CSLP), Ontario Student Assistance Program (OSAP)
and Programme de prêts et bourses du Québec.
1. Canada Student Loans Program (CSLP)
Under this program, as mentioned earlier,
borrowers experiencing financial difficulties will have relief on interest and repayment
of capital for three-month periods, for a maximum lifetime benefit on full-time loans of
up to 30 months within the first five years of repayment.
To help Canada Student Loans Program
borrowers whose financial circumstances make it difficult for them to repay their student
loans, the 1998 Budget introduced modifications to the program. These modifications
consisted of interest relief, extension of the repayment period, extension of interest
relief, debt reduction, and other measures. Interest relief came into effect in April
1998; a person can earn more and still be eligible for interest relief since the
qualifying income thresholds have been raised by 9%. Beginning in 1999, partial interest
relief will be available for graduates further up the income scale who are facing
financial difficulty.
The repayment period will be extended to
15 years for individuals who have exhausted 30 months of interest relief. This
will lower monthly payments by nearly 25% at current interest rates. Interest relief will
also be extended, from 30 months to up to 54 months during the five years after
leaving school, if, even after the repayment period has been extended to 15 years, an
individual remains in financial hardship.
Debt will be reduced for the minority of
individuals who remain in financial difficulty after all these relief measures have been
implemented. Effective this year, the government will reduce the loan principal if annual
repayments exceed, on average, 15% of the individuals income. The maximum amount of
assistance will be $10,000 or 50% of the loan, whichever is less. To qualify, five years
must have passed since the completion of studies and the individual must have exhausted
interest relief.
To ensure that Canada Student Loans
continue to provide as much assistance as possible to those who need them, the government
is taking steps to ensure that both educational institutions and students use the program
as it is intended. These steps include:
- dealing with students with a history of severe credit
abuse;
- proposing changes to provisions in the bankruptcy
legislation so that student loans will survive bankruptcy for 10 years after the
completion of studies;
- working with the provinces to strengthen the criteria for
eligibility of educational institutions; and
- improving communications with student borrowers.
The federal government will work with the
provinces that participate in the Canada Student Loans Program to better coordinate
federal and provincial student financial assistance and move toward a single loan product.
2. Ontario Student Assistance Program
(OSAP)
In February 1998, the Ministry announced
changes to Student Assistance. These follow the business plan objective of reducing the
overall default rate to less than 10% within the next five years. The changes include:
replacing the loan forgiveness program
by the Ontario Student Opportunity Grant which, after the student completes his or her
academic year, will provide a grant for the amount assessed above the $7,000 already
accorded to the student as a loan;
- repayment over a longer period of time
(15 years as opposed to the current limit of 9½ years);
- lower payments during the first few years, when borrowers generally have lower incomes;
- allowing borrowers to make interest-only payments for up to 12 months; and
- enabling students with very low incomes to receive assistance from the government to
meet their interest payments for up to 18 months;
requiring the institutions to share the
costs of their high-default programs if their 1997 loan default rate was 15% or more above
the provincial average of 23.5%, starting with loans issued in 1998-99. In the following
year, this policy will apply to institutions whose loan default rate is ten percentage
points or more above the 1997 provincial average;
cutting access to loans: new applicants
will not be eligible for a student loan if they have been 90 days in arrears on three
or more personal loans, each with a value of $1,000 or more, within the past three years.
Students may appeal if they can demonstrate exceptional circumstances and a strong
likelihood of being able to repay their student loans. It is expected that this measure
will affect about 1% of loan applicants;
requiring institutions to provide
students with information about graduation rates, placement rates, and loan default rates
for their programs. Institutions that do not currently collect information on graduation
and placements must begin to do so by September 1999;
establishing trust funds valued at
nearly $600 million to aid students in need at colleges and universities under the
Ontario Student Opportunity Trust Fund program. These trust funds are expected to assist
180,000 students over the next 10 years. The government will continue to match
donations to trust funds at colleges through 31 March 1998;
3. Programme de prêts et bourses du
Québec
Amendments were made to the law on
19 December 1997. They were designed to help the government recover a bigger part of
the lost revenue than was previously possible and to help students manage their debt. As a
result of the amendments, the government will:
abolish postponement of repayment of
student debt for certain groups; namely, those who, at the end of their studies, have to
complete a course of professional training in Quebec, or participate in certain sports
training as recognized by the Ministry of Municipal Affairs, and those doing post-doctoral
studies who have sufficient financial resources to pay back their loan;
RELATED
ISSUES
With recent increases in tuition and the
accompanying rise of student indebtedness, the financing of university education has
become a prominent concern. Parliamentary committees have been devoted to issues in
postsecondary education; there have been announcements of government initiatives in the
area and attempts to find alternatives to the current system of financing university
education.
A. Reports of Committees
In December 1997, two committees presented
their reports. The first report, from the Committee on Human Resources Development and the
Status of Persons with Disabilities, chaired by Reg Alcock, M.P., was entitled
"Ensuring Access: Assistance for PostSecondary Students." The main
recommendations were:
The other report was presented by the
Special Senate Committee on Postsecondary Education, chaired by Senator Bonnell. It
recommended that the federal government:
allow borrowers to deduct interest paid
on student loans from their income tax, thus treating human capital investment in the same
way as physical capital assets (Globe and Mail (Toronto), 18 December 1997).
B. The 1998 Budget
Experts agree that the 1998 Budget was
dedicated to education. The Canada Millennium Scholarship Endowment is the biggest
investment, at $2.5 billion. Intended to reward academic excellence, it will provide
an announced 100,000 scholarships, beginning in the year 2000, to help low- and
moderate-income Canadians attend universities and colleges. The scholarships will be given
to full- and part-time students each year over 10 years.
Other important measures are the Canada
Education Savings Grant, increased funding to the three granting councils, Canada Study
Grants, and Tax Relief for Interest on Student Loans. The Canada Education Savings Grant
will benefit families who save for their childrens education through registered
education savings plans. The increased funding to the granting councils is aimed at
supporting advanced research and graduate students. The Canada Study Grants will help over
25,000 needy students with children or other dependants with a grant of up to $3,000. Tax
Relief for Interest on Student Loans will give all Canadians tax relief on interest
payments on their student loans; effective this year, individuals will be allowed to claim
a 17% federal tax credit on the interest portion of the amount of loan repaid in the
current year. The credit will apply to interest payments on loans under both federal and
provincial student loan programs. Since the bill related to this budget has only passed
first reading, changes could still be made to these guidelines.
C. Income Contingent Repayment Loans
Schemes
As student indebtedness rises, so does
the risk of loan defaults. This is especially true for those who do not find well-paying
jobs after their schooling ends. With traditional loans, the debtor must pay a proportion
of the outstanding loan and accrued interest each month. This payment could be a very high
proportion of the debtors monthly income, and in some cases -- if the debtor does
not find a job after school or is laid off -- there may simply be no income from which to
repay a loan.
One proposal is for loan repayment to be
linked directly to a debtors income -- the so-called Income Contingent Repayment
(ICR) loan scheme. This proposal has been around for decades but seems to be taken more
seriously today.
The proposed ICR can take many forms, but
all have basic elements in common. A student borrows a certain amount and agrees to pay a
certain proportion of future income toward the loan (say, 0.7% of income for every $1,000
borrowed). The proportion depends on several factors, such as the life of the loan and the
definition of income, which can be pre-tax or after-tax income or an amount above some
arbitrarily specified level. The proportion of this income, however defined, is similar to
an income tax rate; several ICR proposals have suggested using the income tax system to
collect the loan repayments.
Although an ICR scheme might solve the
problem of defaults, except, perhaps, for those who leave the country or leave the
workforce, there are some specific concerns, the two most important of which are related:
the opportunity for adverse selection by borrowers under the scheme and the ability of an
ICR scheme to be self-financing.
Under adverse selection, those students
expecting relatively low future income -- say, an English major who intended to become a
poet -- would opt for an ICR scheme because they knew that the ICR would allow them to pay
less than they would with a traditional loan.
Some suggest that the ICR schemes could be
self-financing because those with above-average incomes would pay enough to compensate for
those with below-average incomes. Unfortunately, such projections break down, as those who
expect relatively high future incomes (doctors, for example) would be likely to find
alternative ways of financing their schooling. Those left in the ICR scheme (poets and
those expecting relatively low future income) would probably not pay enough to make the
scheme self-financing, unless the proportion of income to be repaid was set very high.
It may be possible, however, to construct
an ICR scheme that, while not completely self-financing, would be less costly to the
government than the current student loan system.
CONCLUSIONS
The fiscal problems of governments have
affected Canadian universities and their students. At the federal level, cutbacks in
Established Programs Financing (EPF) and Canada Health and Social Transfer (CHST) have led
to reductions in the revenues of provincial governments. These reductions have been felt
in the areas financed by the provinces, of which education is, of course, one. When the
universities faced lower government support, they responded, in part, by raising tuition
fees. Provincial governments also reduced direct spending on students by replacing student
grants with loans.
The immediate result from the
students viewpoint has been a higher cost for university education. For those
without the financial resources to bear this higher cost, the result has been higher
student indebtedness. It is unlikely that these trends in university finances will be
reversed in the near future.
Although it is still too early to pin down
the effects of the changes in university finances and student indebtedness (some of the
available data on student debt come from the late-1980s and early-1990s and thus do not
capture the recent surge in tuition fees), policymakers are attuned to the concerns of
current students. The two recent reports by parliamentary committees have focused
attention on issues discussed in this paper and should help shape future government
policy, as could already be seen in the 1998 Budget.
BIBLIOGRAPHY
Bourgouin, Bernard. "Financial
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(1) It
does not matter that the initial average loan levels at the bachelors level were
higher for those who went on to a masters degree. The much lower proportion of
masters graduates with loans means that a large number of the masters
graduates started their loan balances at zero when they entered graduate school.; that is,
those who went on to a masters degree had assumed less debt at the bachelors
level.
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