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Repayment assistance for student loan borrowers


 

The federal government has released a few additional details on the post-secondary education spending initiatives that were first announced in the 2008 budget. The release does not appear to have anything new on the Canada Student Grants; however, the details on the new Repayment Assistance Plan are news (to me at least):

In the 2009-2010 academic year, a new student loan Repayment Assistance Plan will be in place to make it easier for student loan borrowers to manage their debt by ensuring that they can afford their loan payments.

The Repayment Assistance Plan is an optional program for students facing difficulty in meeting their student loan payments including those with permanent disabilities. This new Plan will ensure that student loan payments will be affordable, that individuals with very low incomes will not be required to make payments and that the eligibility criteria will be easier to understand in order to obtain the support they need.

Loan payments will be based on the borrower’s income and debt levels. No more than 20 per cent of a borrower’s income would go towards the payment of the loan. Furthermore, no borrower will have a repayment period of more than 15 years.

The Repayment Assistance Plan replaces the Interest Relief and Debt Reduction in Repayment programs. Current Interest Relief and Debt Reduction recipients will transition into the new Repayment Assistance Plan.


 
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Repayment assistance for student loan borrowers

  1. Yes Dale – the details of the new Repayment Assistance Plan (or RAP) are very much new.

    Perhaps surprisingly, the government does appear to have moved forward on income based loan repayment. But studies do show that this type of repayment system means many people pay more interest over the life of their loans because they take longer to pay them back.

    This is why it is vital that student loan interest rates are reduced or eliminated. If, as currently envisioned, an income-based loan repayment system is started with the same sky-high interest rate policy currently established by the feds, the new system will be a huge cost for borrowers.

    Here’s hoping reporters will press the government to dramatically reduce the interest rates on loans if they intend on spreading out the repayment period.

    Coalition for Student Loan Fairness

  2. I believe the federal RAP program that they’re looking to implement is based off of the RAP program that NS brought into effect last fall and that was suggested for NB by the Commission on PSE.

    If you would like more specifics, I’m sure you could contact the Alliance of Nova Scotia Student Associations (ANSSA) [ed@anssa.ca]or student financial services for NS.

  3. For a few more details on NS RAP visit: http://studentloans.ednet.ns.ca/repayment_options01.shtml.

    Julian, you’re right that there are some problematic elements of something like a more traditional income-based repayment plan. What makes this system fundamentally different are a few factors.

    First, the federal program won’t allow a repayment period to exceed 15 years meaning that amortization periods will not be unduly lengthened in order to achieve an “affordable payment”. Instead, in the first five years of RAP, interest not covered by the affordable payment will be forgiven and the affordable payment will be applied to the loan principal first. After “stage 1”, if the borrower is still having difficulty with repayment, a number of other measures would kick in to ensure that the payment is still affordable and that the repayment period would not exceed 15 years.

    Secondly, RAP replaces current debt management measures like interest relief and debt reduction programs. Whereas interest relief as it currently exists is an “all or nothing” proposition where a marginal change in income can take a borrower from full support to no support at all, RAP is based on the assessment of an “affordable payment” and will not require any payment from those with very low incomes.

    Also, the political climate that this program was introduced in Nova Scotia should be noted. At the same time that RAP has been in effect for the NS portion of the loan, so has a 2% reduction in interest rates, a tuition freeze and a tuition fee reduction.

    Admittedly, the details of RAP are fairly complex and the feds, it seems, have not either finalized or made available all of the details.

    I can say, though, that the experience of RAP in for Nova Scotia students and borrowers has been a very positive one.

  4. Sorry, Julian. I’m not eniterly sure I understand what you mean when you say the new system will be “a huge cost for borrowers”. It seems to me that the only people who will be using this system are people who in past would have defaulted on their loans – i.e. people who could really use some help. Are you suggesting that lowering their monthly payments and lengthening the repayment period (which, as you say, does mean more interest paid in total) is a *worse* alternative to default? Or are you suggesting that this is generally a good idea, but it would be better if interest rates were lower?

  5. Hi Alex and Paris,

    Nice to hear from you both – I hope you are both doing well.

    RAP as a concept is fine. For those who are low-income and can’t pay, this system will replace the existing Interest Relief program, and is much more flexible. We can all agree that improving the “all or nothing” Interest Relief is a good idea – and the experiment in Nova Scotia provides an excellent platform for testing this new system.

    The issue for us is that borrowers, as far as we can see, will continue to pay high interest on student loans provided that they aren’t able to demonstrate a low enough income to qualify for RAP.

    Alex, you have said on many occasions that Canada’s student loan interest rate is too high compared with other G8 nations. Interest is a key factor in defaults and dragging out repayment periods. It reduces the income significantly of those leaving school and trying to start families, buy a home or car, etc. Reducing the interest rate would reduce the number of people that need to apply for RAP, reduce the burden of student loan repayment and perhaps amortization periods for many. As loan amounts continue to grow for many, interest charges will increasingly be a concern.

    As well, the so-called ‘6 month grace period’ as far as we can see, continues to be subject to high levels of interest. Why not give students a break for the six months after graduation? – like three provinces currently do.

    As well, the new system does not include an ombudsperson. What is the point of this system if there is no way for citizens to police the conduct of the department and its policymakers when they have been shown to make many mistakes? Borrowers should have the right to question the system and its policies – currently borrowers have no way to do this. An Ombudsperson Office would go a long way to solving this problem, and would be a relatively inexpensive way of doing so.

    Change is good – but we must not forget the sky-high interest is a key cause of many other problems in the system. If we don’t deal with it, we will continue to need assistance programs to clean up after it.

    Best, Julian

  6. So in essence, the new government policy is, we’ll give you an education, if you give us an additional 20% of your after tax income for up to fifteen years.

    Gotta love the student loan racket. The government makes us pay both the costs and interest of making it so that we can provide higher levels of taxation and use less services.

    I still haven’t figured out why our government doesn’t clue in that the best way to get someone off of welfare, unemployment insurance, or away from crime is to get them an education. Our government needs to be doing everything it can to get these people a higher level of learning — charging them interest for the priviledge does not fit.

  7. I think you may have misunderstood some of my earlier work, Julian. I don’t think I have ever said that interest rates are “too high”. I’m not even sure what that means. Clearly they aren’t too high for everyone becuase most students pay off their loans without difficulty. And in any case, interest is just rent on money; it is set generally in relation to expectations of future inflation rates. An 8% rate now might be “too high”; 15 years ago people would have begged for rates like that. So I don’t think it’s possible to make an absolute statement like that.

    I *have* noted that Canadian student loan interest rates while students are in repayment are higher than those in other countries, relative to inflation and prevailing government rates of borrowing. But I have also noted that Canadian student loan interest rates are much lower than others while students are in school. The “sky-high” interest rates you refer to are only half the picture. The flip side is that Canadian student loans have *negative* interest rates while students are in school, and indeed one of the reasons interest rates are so high in the post-school period is precisely to pay for this very large subsidy.

    I have also made some comments to the effect that if CSLP were to equalize interest rates over the life of the loan (that is, raise interest rates while students are in school and reduce them afterwards) there would probably be more winners than losers; moreover, the winners would be people who took the longest to repay (unlike th present system where the people who get the biggest subsidies are the ones who repay their loans very quickly).

    If we were just to reduce interest rates in the post-graduation period, we would no doubt help some people, but we would also create a large amount of windfall gains to people who are quite capable of repaying their loans without an added subsidy. I’ve not got the figures in front of me, but only about 1 student 3 ever ends up on IR and that ususally for not that long. Giving a blanket subsidy to ALL students for the entire life of the loan just to stop a minority of people using RAP or IR for a few months is therefore difficult to justify on the basis of saving money or on general efficiency grounds.

    You’re dead right about the ombudsman, though.

  8. Hi Alex,

    I would first emphasize that the uptake for Interest Relief is low largely because people thousands are declined each year – you’ll recall our ATIP request on this that found over 80,000 were turned down in the last few years. So, anything that improves access to interest relief for struggling borrowers is a plus.

    In terms of so-called ‘in-study’ interest relief, few will buy the government’s line on that – neither should student groups. The fact is that if you look carefully at the figures, you’ll see that the government has never spent more on in-study interest relief in a given fiscal year than it makes in student loan interest revenue from borrowers in repayment. So the argument that everyone should thank the government for not charging interest while people are in school is really silly. Many government programs provides funds for services without interest because they understand that future tax dollars come from productive citizens – charging high levels of interest amounts to a tax on the poor – who, by the way, wouldn’t pay any interest if they could pay up front.

    With respect to relative interest rates – let us be perfectly clear: the feds pay about 4.25 percent in interest to borrower student loan funds from the Bank of Canada, but charge students 2.5 points above prime to borrow the money – that spread is about 3 percentage points – no subsidy here!

    In the end, the question is do we want to encourage people to spend their money in the marketplace or on a government tax (student loan interest). Let borrowers pay their principal and be subject to interest only if they don’t pay their loans as agreed upon graduation – that is an incentive.

  9. Julian,

    First, you can make debating points like that about the in-school interest subsidy all you want, but the fact remains that it costs the feds $200-$250 M per year. Yes, that’s less than what they are collecting through interest charges later on, but you can’t pretend it’s not an important subsidy. The real value of students’ loans *decrease* while in school thanks to this zero nominal interest policy. That’s a very large subsidy to students and it seems churlish to dismiss it.

    Second, calling student loan interest a “tax on the poor” is like saying mortgage interest is a tax on people who can’t pay 100% down on their homes. It sounds nice rhetorically, but isn’t factually correct unless the money in question has no time-value. Students benefit from being able to access a loan without a parental co-signatory or any collateral. In return, as you say, the government asks students to repay the principal, the government’s cost of borrowing on your behalf, and, as you say, 3 cents on the dollar every year for every dollar outstanding. Now you can call that a tax if you want, but to me it sounds like a pretty run-of-the-mill commerical transaction.

  10. Alex, this point you make perhaps best explains the disconnect:

    “…but to me it sounds like a pretty run-of-the-mill commercial transaction.”

    Canadians are not interested in the marketization of student loans, nor are they interested in making post-secondary education unattainable for lower and middle class students.

    Nobody here is “dismissing” the in-study interest subsidy – we are dismissing the notion that offering it excuses incredibly poor public policy towards those in repayment – and attempts by the feds to cover the costs of what should be a social program by way of taxing borrowers with sky-high interest charges.

    How about this compromise: provide borrowers with a non-refundable tax credit for the entire amount billed to them for student loan interest – not the 17% currently offered.

  11. Alex,

    I think there is a difference between student loans and mortgages, because post-secondary education is fundamentally a public (or parapublic, or whatever the word people prefer to use) sector in Canada. The PSE system as a whole is something all Canadians contribute, whether through taxes or user (i.e. tuition) fees.

    I suppose we all agree that as long as the interest rate is superior to inflation, students who borrow to pay tuition will end up having paid more for their post-secondary degree than those who could afford the fees upfront. (The only exception, I can imagine, is the case of a very poor graduate for whom 20% of his/her income over 15 years doesn’t even repay the original tuition bill.)

    So for the financial aid program to be “income-class neutral” (i.e. not being a tax on the poor), in theory at least, these student borrowers need to receive enough grants (and yes, waiving the interest during study time is a form of grant) to offset the long-run interest costs. I say in theory, because how much the student will pay in the end is hard to predict ahead of time.

    It is clear then that student loans have to be accompanied by a necessary amount of grants if they are to be considered a progressive (relative to income classes) policy at all.

  12. To add to this perspective, I guess, I will add that if a program is neutral from the student’s perspective (i.e. grants are equal to extra tuition paid in interests, all this adjusted to inflation etc.), it is not equal from the PSE system’s perspective, because of administrative costs which are inevitably higher for loans (dealing with repayment, etc.) than for grants (which are an immediate expense without follow-up).

    Thus there might be, from a pure efficiency point of view, a compelling argument in favor of a more progressive financial aid policy (more grants and less loans), as a larger portion of the “grant-system” money goes directly to support education compared to the administrative expenses of the “loan-system” money.

    Of course there are more complexities to add, but I wonder if the governments ever considered studies that took into account even this basic level of complexity I’m mentioning here.

  13. Whoever said education was a public good? It may be publicly subsidized, but it has very high rates of private return, which is precisely why we ask students to pay tuition.

    Actually, housing is not a bad comparitor sector for education. Housing, like education, is frequently described as a right. Like education, it brings substantial private benefits, but public policy sees it as a general social good if more people own their own houses. And yet the subsidization regime we have for housing (e.g. CMHC) is quite different from what we have for education.

    On the specific point that mortgages are different from student loans: of course they are. But in both cases, it is factuallly incorrect to describe interest as a tax. The statement “students who borrow to pay tuition will end up having paid more for their post-secondary degree than those who could afford the fees upfront” is simply incorrect. It’s only true if neither the borrower or the lender places any greater value on having money today than they do on having money tomorrow (which I guarantee you isn’t the case) – that’s why we measure things over time in terms of net present value.

    For a completely different set of reasons, I quite agree with you about the need for grants to complement loans. Canada has roughly doubled the amount of grants available to students in the last decade, but we could stand to get some more. But I don’t think you can make the argument on the efficiency grounds you mention. The government of Canada spends about 30-35 cents on each dollar lent on administration and various forms of subsidies, meaning that for every dollar they grant, they could give out almost three dollars in loans for the same cost.

  14. “It may be publicly subsidized, but it has very high rates of private return, which is precisely why we ask students to pay tuition.”

    You’re using a statistical argument to justify an individual expense… the rate of return is not guaranteed in anyway nor is it high or even positive for all university programs compared to all other possible choices.

    In any case, anyone who ends up making more money thanks to their university degree will pay more tax and thus contribute to a bigger part of the subsidy to PSE. Isn’t that a simpler and more direct way to deal with the higher rate of return question?

    —————-

    “The statement “students who borrow to pay tuition will end up having paid more for their post-secondary degree than those who could afford the fees upfront” is simply incorrect. It’s only true if neither the borrower or the lender places any greater value on having money today than they do on having money tomorrow (which I guarantee you isn’t the case) – that’s why we measure things over time in terms of net present value.”

    It’s not as if most students who borrowed had the option to pay upfront and instead chose to borrow and pay later due to the value of having money today rather than tomorrow.

    The way I see it, it is about equality of chances. As much as you could argue that some people through their career work “deserve” to be richer, I cannot imagine the same argument being made of people who just graduated of high school.

    ———-

    “But I don’t think you can make the argument on the efficiency grounds you mention. The government of Canada spends about 30-35 cents on each dollar lent on administration and various forms of subsidies, meaning that for every dollar they grant, they could give out almost three dollars in loans for the same cost.”

    I don’t think you can compare the grant money (which goes in the PSE system directly) to the 30-35 cents per dollar lent which goes to administer the loan program itself, and does not by itself increase public funding of PSE.

  15. On public rates of return: you’re right, nothing in life is guranteed. But for most people, in all fields of study, private returns are strongly positive. The fact that it doesn’t work out for a minority of people does not change the fact that that there is a strong element of private return in human capital investments, which is why higher ed is not an exclusively public good.

    I’m not clear at all what point you’re saying about Net Present Value. I agree with your statement about equality of chances; but I can’t see what it has to do with your original statement (which I challenged) that any amount of real interest is a “tax” or that it implies that poor people are paying “more”. It doesn’t, unless you believe that money has no time value.

    On grants, we seem to be talking about different things. I was talking about grants/bursaries given directly to students; you appear to be talking about operating grants to universities (at least I think so – otherwise your statement doesn’t make sense to me).

  16. I think the larger political framework your using to analyze the issue of student loan interest rates betrays your political ideology!

    Bottom line: lower interest, faster repayment rate, fewer defaults…

  17. Julian: Pot, kettle, black? And it’s really nice of you tell us what Canadians really want.

    I take greater exception to Think or Thwim (who now believes the new title ‘T. Thwim’ either adds some credibility to his claims, or fools the rest of us on his identity) and his notion that education is some sort of panacea for all of our social problems. If only we could educate criminals, they wouldn’t commit crimes and the homeless could (magically) have homes!

    This is incredibly naive. The reality is that not everyone is capable of pursuing an education. And even if they were, all we’d end up with is smarter criminals and overqualified welfare recipients. People can go to school, but education doesn’t always ‘take’ – it doesn’t solve the more deep-rooted problems that lead people to crime or keep them from being able to hold down a job.

    Setting this aside now, I think we can all agree that more grants and funding from the government going to students is a good idea. I think the misconception is that the student loan system is supposed to be a method for getting this money to students. It’s not. That’s why it’s called the student -loan- system, and not the student -grant- or student -funding- system.

    Student loans should be regarded as a last resort to enable people to go to school. Can’t pay for it yourself, can’t find enough money in existing grants, etc, the option is there to take out a student loan and go to school.

    But why make such a system at all, why not give these students the funding in the first place? The fact is that there either isn’t enough money (or maybe just not enough willingness) to properly fund a full system of need-based grants. But, because we don’t want students who can’t afford school based on grants and their resources alone to forgo education altogether, a self-sufficient loan system was setup. Aside from some initial outlay and administration, this costs the reluctant government only a fraction of what a fully-funded grant system would. (Aside: does anyone have numbers on the profitability, or lack thereof, of the CSL system?)

    To summarize: if we can’t (or won’t) give students all the money they need, we can at least guarantee that they can still go to school, even if it means signing over a portion of future earnings. That is the purpose of student loans.

  18. Julian,

    Of course the issue is about access for lower-income students. But to the extent that finances are a barrier for these students, in the fifteen years I’ve been working and studying in this field, I have never seen a single credible article or monograph that seriously suggests that the interest rate on a student loan or its repayment terms are a factor in deterring access. Not one. I’ll happily read anything you can produce to the contrary, of course, but it’s simply not credible. What matters is reducing net costs – ideally through large grants targetted directly at those from low-income families, to help persuade them that education (a slightly risky investment, as Philippe noted) is indeed “worth it”. Kids from backgrounds that are middle-class or higher tend to already know that it’s worth it and don’t need grants to tip them into going – what they need are loans which can help them bridge the gap between current costs and future income.

    Once you get into the question of loans, the question is: to what degree should they carry a subsidy? My feeling is that there is almost no a priori need for them to carry any subsidy at all (a loan that required students to pay the government rate of borrowing or something close to it through the life of the loan, as is the case in the Netherlands, would be ideal). Most students will be able to pay back their loans comfortably; thus, any subsidy is a non-targetted windfall gain to these students. I would far prefer to reserve the money to areas where it is more needed: more grants for low-income students, and more money for that fraction of borrowers who genuinely do run into repayment difficulties (and for whom some interest subsidies and reduction of principal makes sense). The more you get into generalized, non-targetted interest rate subsidies which have a dubious-to-non-existent effect on access, the less money you have to make the targetted investments that really matter in terms of access.

    To me, it’s simply a matter of where you get a bang for your buck. Targetted grants to students from low-income families give you that. Large-scale reductions in the interest rates paid *after* graduation have never been shown to do so. Public money being scarce, I tend to favour the grants option and remain heavily sceptical about the other. To me, preferring one to the other is a simple efficiency call. You can call this “ideology” if you like; but I think you’ll find that most serious policy analysts tend to look at problems in a similar way.

    And I’m glad you are not dismissing the student loan in-school interest subsidy. It’s just that when you use phrases like “the argument that everyone should thank the government for not charging interest while people are in school is really silly”, you do tend to give the opposite impression is all.

  19. If you’re looking for a perfect solution, Travis (if that is your real name), I can tell you right now it doesn’t exist. That said, I get my assertions from Statistics Canada. They’re the ones who’ve shown that post-secondary education correlates with a better quality and perception of health, with lower rates and shorter periods of unemployment, with less reliance on social welfare, with lower rates of crime, with higher rates of successful entrepreneurship, and with more volunteerism and charitable donation. What’s more, those most likely to attend post-secondary education are children of parents who have attained post-secondary education — that factor having a higher correlation than any other, so it’s a virtuous cycle.

    Now, will it eliminate every criminal or welfare recipient in the nation? Probably not. But considering that an Alberta study pegged public post-secondary investment as providing returns of $4 to $21 per dollar invested (depending on how broadly you examined the returns) it seems like a boneheaded move to not prioritize post-secondary education for anybody with the ability and desire to pursue it — and to even invest some in stimulating that desire.

    The argument that it would just make better educated criminals and welfare recipients is false, and is actually very similar to arguments by those who were against fully funding primary and secondary school education. The truth is it’s allowed our society to advance in many different ways, bettering everybody’s lives.

    As for Alex’s argument that the private individual receives benefits, that could easily apply to any public investment.. that’s kind of why we do them in the first place, isn’t it? We build public roads so that the private citizens can use them to move themselves and goods around. We publically fund fire departments so that private individuals receive the benefit of that protection. Does that make them private roads and private fire departments? Of course not.

    Post-secondary in Canada, with a few exceptions, is primarily funded from the public purse. That makes it a public service/good. Moreover, I’d suggest that, given the virtuous cycle a post-secondary education supplies, the public sphere gains far more benefit over the longer term from an individual’s post-secondary education than than the individual does themselves. This also lends to the argument that it’s a public good.

    Now, as to the rest of Travis’ comment speaking of the student loan system, I do agree with all of that, with the qualifier that I believe it’s the lack of will, not resources, that is preventing us from moving to a fully grant-based system. But it’s this very point, I think, which is what the rest of this debate is about — should we have the will as a society to be willing to eschew profiting from students in the short term in order to ensure as many pursue post-secondary education as possible?

    Given the public returns over the long term? I think we should.

  20. Hi Alex,

    I can see you are trolling the internet regularly – as do I!

    I do enjoy a good debate, and I don’t doubt you feel strongly that grants are important — perhaps more than an interest rate cut. As you well know, too, your long and well established knowledge and research abilities are not in doubt at the Coalition.

    Let me offer you some thoughts that may change your mind – slightly. I work in a university where the fields of, simply put, “Arts and Humanities” are under significant strain. Students are increasingly making the decision to select careers that offer a more “direct” line to a job; the “arts” degree is seen, more and more, as a riskier degree, when one considers the debt loads. Some programs in my university are even changing their brand names to address this concern. At the same time, the student body in arts programs is changing. In my field of History, few students were on loans; they largely came from upper middle-class families where this was not a concern. Yet those on loans, tended to gravitate to degrees where a job was likely possible upon graduation. So it is no doubt the case that reducing financial barriers for those that must take out student loans (including interest rate cuts) should be considered.

    Are the provinces of Alberta, Newfoundland and Labrador, PEI, Ontario, Quebec, and Nova Scotia all wrong for charging less in interest on loans in repayment than the feds do? Is it wrong that Alberta, NS, and NF recently cut their provincial student loan interest rates, making the argument at the time that giving borrowers a break is good for the economy and the marketplace? Is New Zealand, wrong for offering an interest rate cut? Can they all be wrong for wanting to invest in people by reducing repayment costs? I think not.

    For those that argue grants are more important, I say, yes! But what about the 510,000 borrowers already in repayment across Canada? Do we simply ignore all of them (as some have done for many years in the student world) so we can demand new grants? For the thousands that suddenly had the BC grant program cut from under them, for the thousands who had more costly programs, (like Emily Carr), a break helps!

  21. Julian, I guess the point I’m making here is that interest rate cuts can in no sense be described as “investing in people”. We’ve established, I think (or at least you haven’t offered any evidence to the contrary), that interest rates make no demonstrable difference to access – they affect those who choose to go and must borrow to do so, but they aren’t affecting the decisions of those who go in the first place. So any expenditure one makes is only affecting those who have made their investment; they’ve been to school, they’ve got their education. What cutting interest rates does for these people is increase the (private) returns to the education they’ve already obtained. Why would we do that? I mean, yes, I’m all in favour of providing more help to those borrowers who are genuinely in trouble for the (generally short) period of time they remain in trouble, but generalized interest rates cuts help ALL borrowers for the life of the loan. As a means of helping those who need help, they are not very efficient.

    In that last post you basically advance two arguments in favour. The first is: all these other governments are doing it, so why not the government of Canada? I’m not sure about the logical force of this argument: it seems to me to be a variant on “Mom, Timmy’s jumping off a bridge, can I jump off one, too?” Your other argument is that grants are good, but people who went to school a few years ago and may not have benefitted from grants deserve something too. To which I can only reply: why, exactly? What has one to do with the other? It’s just me-too-ism.

    (I’ll allow that there may be other, better arguments in favour. The preceding was merely a comment about the arguments you advanced in your last post)

    Let’s see broad-based student loan interest-rate reductions for what they are (in New Zealand especially) – naked electoral bribes to the young urban middle class. They leave more money in the pockets of people who by and large are quite successful these days – young professionals. I’m sure they welcome this break, and that for some it is a necessary break. But in the main, they simply put more money in young people’s pockets which they can then use for consumption. Just like a tax cut.

    I don’t mean to be too down on this idea. I do think that reducing student loan interest rates – especially if it is paid for by an offsetting increase of the in-school interest rates – can have some progressive effects, by reducing subsidies to people who pay back their loans quickly and decreasing total payments who take a long time to repay. And even if all we’re talking about is a generalized rate cut, there are certainly worse ways of spending public money. It’s just that there are also some much better ways of spending it, too.

    T.thwim, you are certainly right to point out the *average* returns of money spent on PSE is quite high. But the same is not necessarily going to be true of the *marginal* returns of any new piece of public spending. Focus a little more closely on the logic of investment: if a government spends more money on education but the number of people going to PSE does not change (which, again, seems to be the case with student loan interest rate reductions), then by definition average returns public returns to investment in education will fall.

    You have to be careful with these investment metaphors. If you start arguing by recourse to what a great investment education is, eventually someone is going to say: “yeah, and we can make it a better investment by spending less!” For instance, imagine what happens if one were to *cut* funding. If public investment goes down, but there are no reductions in the number of people graduating and subsequently paying taxes (which fairly accurately describes what happened in, say, Quebec in the late 90s) then by definition the average return on public investment increases. So you’ll want to be careful about how you deploy this argument, i think

    As for the comparison of higher education to roads or fire departments, I think you’ll find that this is an especially badly constructed analogy. Literally everyone benefits equally from roads and fire services. With PSE, everyone benefits a but from the externalities of a well-educated population, but those who actually attend, and specifically those who attend and complete universty (about one in three youth) benefit a heck of a lot more from higher salaries, more secure employment prospects, etc. And studies have repeatedly shown, in fact, that private returns are somewhat higher than public returns in Canada (though the gap has been narrowing as tuition fees have risen).

  22. Actually, I take back that comment about roads, as there are very strong rationales for toll pricing. Fire departments are a better example of a pure public good.

  23. Alex,

    Thank you for attempting to outline my arguments for interest rate cuts – however, your “framing” of them as you have is unreasonably flippant and ultimately unfair…

    Any attempt to marginalize the impact of student loan interest on borrowers is simply not acceptable – people are struggling every day with this penalty tax – and the Coalition hears from them regularly.

    Student loan interest is a tax on the poor, in part because those with money after graduation pay off these debts the fastest and therefore pay far less interest. Like it or not Alex, we do live in a progressive society, with a progressive tax system – student loan interest, as currently constructed, does not meet this test.

    To suggest, too, that provinces cutting interest rates on provincial loans are somehow the same as those “jumping off a bridge” is rather silly – why not support students instead of fighting against them? Alex, take up the cause of good – reject your overly conservative underpinnings just this once !!

    What I find most odd about your argument is the giant inconsistency you continue to advance about the marketplace. You seem to hate in-study interest relief – a good program that provides relief from costs while students complete their degree(s). Degrees take time, and more people than ever need graduate degrees to compete in the marketplace. We need an educated public. Let students pay back their students loan, but without high levels of interest.

    Your anti-marketplace ideology is expressed this way: you refuse, as far as I can see, to admit that when borrowers are paying high levels of interest in repayment, they obviously aren’t spending their money in the economy. Of course, if these borrowers weren’t paying interest, and instead were spending that money paying off their loans (reducing the government’s risk) or spending the money in the economy, (therefore paying consumption taxes), growing the economy by purchasing consumer products, they would be better off. In turn, the nation would benefit from that money being in the economy. The federal Conservatives don’t touch this issue because it does represent an inconsistency in their ideology.

    You seem to want these millions of dollars in interest to be spent by government – are you suggesting they can spend it in better ways than Canadians? Where is your right-of-centre philosophy here? Where is your recognition that service fees/interest charges are a tax by another means?

    Join us Alex!

  24. I don’t mean to be unfair, Julian. But I can only work with what you give me.

    First off, interest is not a tax. Period. That formulation might work rhetorically and get you a few headlines, but it’s economically illiterate and your continued use of it is unlikely to incline policymakers to take you seriously (and your extensive work on this file *should* make people take you seriously, so you’re selling yourself short with this kind of stuff, I think)

    Second, I don’t think that cutting student loan interest is equivalent to jumping off a bridge. I think that justifying policies on the grounds that “other people are doing it”, as you did, is sloppy thinking. And I also think that pretending that I meant anything else is unworthy of you.

    As for the argument that money spent on interest relief is good for the economy because it stimulates consumer spending, you should keep in mind that the money for interest subsidies comes from taxation. In effect, if you argue for greater interest subsidies from the public purse, what you are arguing is that governments should tax people in order to give them money back through interest subsidies so they can spend it and make the economy better. Even if you discount any deadweight loss from taxation, the best you can say is that using tax dollars to subsidize interest in this way is exactly equivalent (from an economy-wide standpoint) to not not giving interest subsidies and reducing taxation accordingly. Obviously, there is a distributional angle to this (*who* gets to spend the money isn’t a trivial question, and you might be on somewhat more solid ground if you stick to that part of the argument) – but the argument that subsidizing interest rates has *economy-wide* benefits isn’t tenable. This has nothing to do with my being “anti-marketplace”; it’s a simple accounting truth.

    Where we seem to be on common ground is on the view that we both want solutions that will help those who need it most: those who have the largest debts and are repaying them the longest. Which is precisely why I have suggested keeping a steady government-rate-of-borrowing interest rate for the life of the loan: while it would increase student debtin the short term, it would reduce it in the long terms, and providing the greatest benefit to those in repayment the longest. (Alternatively, I could think of other ways of helping that target group: automatic interest reductions if debt-to-interest ratios rise above a certain level, for instance, or automatic matching of repayment contributions if student loans still remained after ten years.)

    A general interest rate subsidy would achieve the same thing, of course, but at greater cost and with greater benefits going to people who are not in any need of subsidy. But if you are as serious as you say you are about providing help primarily to those who are poor in the post-study period, why would you consicously advocate that this be done in a more expensive way than necessary? Why would you insist on making aid for those not in need a condition of providing help to those who truly have need? Why, in short, provide a generalized interest subsidy when more targetted ones are possible?

  25. Alex, your assuming a black or white policy decision-making process here when it comes to allocating education funds.

    You assume wrongly that we can’t advocate for a greater investment in the student loan system, to help ease the burden of student loan repayment. Instead, you say ‘limited’ funds available can best go towards X, Y, Z. You don’t even appear to question whether the current investment levels are correct – or worst still, maybe you think there’s too much being spent on education already!

    As soon as you, as a policy adviser, assume we can’t press for a better investment in education you have already lost the opportunity to see the larger picture and the larger possibilities for improving the system! Government, however, would love you to frame it in these terms — don’t let all of Canada’s borrowers down with such an approach!

    Government spending is all about priorities.

    Remember, all of these debates about giving students an interest rate break have long since been resolved around the world – students in most of Europe and places like New Zealand have long ago been given more generous program – why continue to support a dinosaur system in Canada?? But I suppose from your last post you have decided provinces cutting the interest rates on loans have made the wrong choice – I don’t think Canada’s borrowers (who are also voters, along with their families) agree with you.

    Finally, you can’t dismiss the view that this interest is ultimately a tax – here is why: virtually all other social programs that provide support to Canadians operate on the basis that future tax dollars will come about when Canadians are helped through hard times. But by taxing them like this with interest after they graduate, we only reduce economic investment when borrowers are in repayment – something you didn’t address either.

    Best, Julian.

  26. Julian,

    Other social programs aren’t loans. Student loans are meant to facilitate private investment which carries the likelihood of substantial future returns. Welfare, or EI, or whatever other social program you’re alluding to, don’t have the same clientele or the same goals. I’m not sure why you would therefore draw parallels between them. Again, government intervention in the mortgage market is a much better parallel. Government intervention exists to help people secure capital: it doesn’t exist in order to give people below-market rates on something that could be considered an investment.

    If your definition of “tax” is any government support which falls short of an outright grant, then yes, student loan interest is a tax. But again, don’t expect policy makers to take you seriously if if you use that as a definition.

    I suspect you’re quite right that borrowers don;t agree with me. Just as all voters might appreciate a tax cut, all borrowers might appreciate a cut in their payments. That doesn’t make it good policy.

    Whether I think current levels are too high or too low, the standard for judging *any* investment in public policy is what benefits it will bring. I think you’ve conceded that lower general interest rates won’t change access. they will help some people in general need, but only in a sub-optimal way: the same thing could be achieved at lower cost. I can’t see that you’re giving any justification for this sub-optimal spending other than “other people do it” and “it would make borrowers better off”. Both of which are true but not, to my mind, particularly persuasive.

    Now, as i said, I can certainly think of more wasteful ways to spend the money. increasing universal tax credits for education or lowering tuition would be even worse ways of spending scarce dollars. But all I’m doing is applying the same analytical techniques to your proposals as I do to those ones: why spread money thinly across a large number of recipients when yuou could concentrate more money on those who really need it. And I’ve yet to receive much of a response on that score.

  27. Well, I suppose getting your agreement that borrowers are worthy cause for educational investment is the best I can do!

  28. If you’re not prepared to explain the logic behind not distinguishing between borrowers who actually need assistance in repayment and borrowers who can pay off the loans without government assistance, then yes, it is.

  29. This is a very interesting debate.

    Ian Boyko (Government Relations Coordinator) sent this message to the CFS members’ listserv:

    “On Monday, Minister of Human Resources and Social Development Monte
    Solberg re-announced changes to student financial assistance included in the 2008 federal budget. Monday’s announcement added details to what was publicly available at the time of the budget. In particular, the Minister provided details on long-expected changes to Interest Relief and Debt Reduction in Repayment. Both programs have been replaced with what is essentially a graduated Interest Relief program, re-branded as the ‘Repayment Assistance Program’ (RAP).

    “Please note that there has been some sloppy online reporting of the
    details of this program, leading to some confusion. The program is
    relatively complex and if you have any questions, please do not
    hesitate to contact the national office. We have received several
    briefings from Canada Student Loans Program personnel over the
    summer, and can hopefully provide more details than what is possible
    in an email.”

  30. Mr. Boyko’s position is intriguing; however, if it walks like a contingent repayment loan and quacks like a contingent repayment loan, I would be inclined to call it a contingent repayment loan.

    As I noted over here, anyone in doubt can review the relevant sections (pp. 8-11) in Dr. D. Bruce Johnstone’s Higher Educational Accessibility and Financial viability: The Role of Student Loans which is available here in .pdf format.

  31. Yes Julian.

    In fact, Mr. Usher noted this in his 2005 paper Much Ado About a Very Small Idea: Straight Talk on Income-Contingent Loans. You can download it here.

  32. Let me add a small historical footnote here:

    In 1997 and 1998, the AUCC, CAUT, CFS, CASA, CGC, ACCC and CASFAA all agreed on a common platform on student aid, and put out two position papers on the subject (copies of this are still available on the AUCC website). Key to the plan was an expansion of interest relief and (if memory serves), also a feature called “graduated interest relief”, which is precisely what this newly announced program is (Graduated Interest Relief was actually a feature of the 1998 budget but it was never implemented because it was too complicated to administer…I;m sort of curious to see how this new deal works in practice).

    Anyways, getting AUCC (where I was working at the time) to be on the same page as CFS on these issues was no picnic, as the Presidents at the time were all mustard-keen on ICR while CFS, to put it mildly, wasn’t. But advocating for an expandsion of the Interest Relief program was a cute way to bridge the gap: AUCC could sell it to its members as something that was quite like ICR while CFS could sell it to its members as something that was quite different from ICR.

    It worked: studens got a better deal and both sides got to claim victory and say their principles weren’t compromised.

    It would be nice to see a return to this style of big-tent lobbying on PSE issues in Ottawa, but I suspect it won’t happen until another big recession comes along and forces the various stakeholder groups to make compromises in the common cause again.

  33. Dale: I might be very wrong on this but it always seemed to me that the main reason the CFS was against income-contingent repayment of loans is that they are typically introduced in parallel to other policy decisions which have the impact to increase student debt. Ex: rising tuition fees, reducing grants and increasing loans in financial aid, etc. In this case, the CFS argued, income-contingent repayment does not alleviate the problem of higher debt. Making smaller payments on your debt only means you’ll pay longer and (with interest) more **.

    [** Note that some (like Alex Usher earlier) would argue that this “more” is the same, because of the time value of money, which doesn’t significantly change the argument above ]

  34. I think you are quite right about this Philippe, but this doesn’t explain the Federation’s nomenclature preference for the new contingent repayment loans. Or does it?

  35. Actually it doesn’t seem like the CFS made any public statement about this yet. (It would probably have been on the press releases section of their website if they did.) Or did I miss something?

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