Student debt woes plague Canada

It took me almost a decade to pay off my student loans.

Three years after graduation, I finally secured a stable, full-time job. By then, the added responsibilities of rent, bills and other expenses meant that I couldn’t pay my two loans off as quickly as I’d hoped. Still, I only owed $15,000. Most students today aren’t as lucky—and it’s only going to get worse.

Although 94% of Canadian graduates get a job within two years, the Council of Ontario Universities says the average salary two years post-grad has remained at $49,000 since 2008.

Meanwhile, the Canadian Federation of Students warns annual tuition fees could rise to $19,900 in 2035-2036. And plans like the Ontario Liberals’ recent initiative to raise the Canada Student Grant to a maximum of $3,000 for low-income, full-time students are simply bandage solutions for a bigger problem.

Student debt is in a bubble—the price of the asset (i.e., the loan and interest costs) no longer reflects the value of the asset (in this case, a graduate’s future income stream). And, worse, that price is rising while the asset value is stagnant.

What makes a bubble?

Economist Hyman P. Minsky notes a bubble occurs when there’s:

• displacement due to a new paradigm;
• a boom where prices rise slowly and then more quickly;
• euphoria where investors don’t worry about future risks;
• profit-taking by shareholders; and
• panic when investors face plunging values of their holdings.

Current low interest rates are making loans even more attractive to students, leading young borrowers to take on more debt than they can handle because they aren’t thinking about future risks.

But loans are only provided to students who can pay them back, right? Wrong. To be eligible for a federal student loan, you must be: a Canadian citizen or permanent resident; enrolled in a full- or part-time program that offers a degree, diploma or certificate by a designated post-secondary school; and not have exhausted your lifetime limit for financial assistance. Credit is only checked if the student is 22 years of age or older, and applying for her first federal student loan.

The government doesn’t require students to fill out detailed financial histories; it isn’t asking about repayment strategies. So students aren’t thinking about the realities of debt.

And that’s where advisors must step in. Have frank discussions about what it means to take out a loan. The government may offer your client’s child $10,000 annually, but she doesn’t have to use the whole amount if she only needs $8,000. Explain how blowing that extra $2,000 on pizza each year, for instance, will amount to the costliest pizza she’ll ever have, thanks to interest.

Help students come up with repayment plans, which could include monthly payments from a part-time job or loan consolidation. And have them actively pursue financing options, like scholarships and bursaries.

2.5%

The cost of education will rise at a rate of 2.5% above inflation annually over the next two decades.

Source: The Canadian Federation of Students

Combining more sensible tuition fees with advisors who help students better plan for education costs would lessen the burden of student debt on our economy.

Consider this: in 2012 to 2013, the Canada Student Loans Program provided $2.6 billion to more than 472,000 full-time post-secondary students. If this bubble bursts, we won’t have the younger generation’s spending power to prop the rest of us back up like we have in other crashes—they’ll be the ones drowning in debt.