Special to Maclean‘s On Campus
Everyone is asking the question, “Will the US sub-prime mortgage crisis and the expanding tidal wave of causalities affect Canadian individuals and families?” After news first broke about the US financial markets falling, an assortment of pundits laughed at the foolish lenders who got involved with all those unworthy people with less than stellar credit histories, who should never have been lent the money to start with. No one is laughing anymore.
But it’s not only foolish lenders that are entangled in the now-apparent bad policy of lending to people with poor or non-existent credit — the government is also known for this practice, by being in the business of student loans.
Public interest in the normally taboo topic of debt has led to a more serious look at our underlying dependency on credit. Canadians have consistently borrowed more and more money since the mid 1970s and reached a new summit of $365 billion in 2008 in consumer debt (excluding mortgages) up from $187 billion in 2000. Why are we borrowing so much?
Although cautionary tales of over-consumption are commonplace, we rarely talk about how financial institutions make it too easy to borrow staggering amounts. The role of government as a creditor is an even less common topic for conversation.
Ironically, it is the lending and collection practices of governments with student loans that expose deep-seated flaws in how individuals and families solve financial issues, like being able to attend post-secondary education institutions. Government has borrowed the successful marketing notion from the private sector that, by lending money, it helps people. If you want or need a post-secondary education to get employment, the government will help its poorer citizens who cannot afford to attend, by lending them huge, colossal and intimidating amounts.
This misguided principle of a government body lending public money to poor people is simply indefensible. Let’s try to wrap our heads around this for a moment. The government is lending money to people who cannot afford something. Isn’t this what has caused the credit crunch mess to start with?
This principle has undergone further mutation as the government amended its bankruptcy legislation in 1998 to prevent impoverished and insolvent student loan debtors from access to a bankruptcy discharge. Air Canada had no such obstacle with bankruptcy legislation in 2003, as no other debtor but student loan debtors — who have not breached any civil, criminal or moral code — are disenfranchised from the fresh start principle. In other words, the government in 1998 has used federal legislation and parliament to convert the bankruptcy process from one designed to resolve impossible debt problems to a collection tool for student loan debts.
What’s particularly offensive about this new technique for collecting debts is how you can run up your charge cards and lines of credit to their limits for reckless and foolish things and have these erased by a bankruptcy — but not the student loan. Student loans are not used to buy flashy cars, extravagant furniture, expensive clothes, excessive entertainment or travel, but rather for an education. And this post-secondary education is most often not a voluntary choice as most employers demand some type of certification or designation to hire people. Go figure.
The substance of government-sponsored social programs is making the choice to help those who need it with public funds. But lending money is a completely different matter. It creates debtors and creditors, who have a completely changed relationship from citizen to polity, constituent to parliament. Government as a creditor no longer acts in the public interest but rather as a creditor with a determined interest in collecting its debts above and before any other creditors. The amendment to the Bankruptcy and Insolvency Act in 1998 confirms this bias irrefutably.
It’s currently in vogue in Ottawa to argue that student loans should be revenue-neutral, that the program should not be a drain on the taxpayer. This, of course, sidesteps the issue of the exorbitant costs for post-secondary education. For those who subscribe to revenue-neutrality there’s only one fundamental maxim: you don’t spend more than you bring in. You balance your budget and that’s all there is to it. There’s no need to worry about the prohibitive and rising costs of post-secondary education as this falls outside of their mandate, window and box. You don’t even have to worry about how much is lent because of the invincible debt, shielded from bankruptcy.
The student loan program, following the lead and in the shadow of the private sector, lends more and more money to avoid the realities of the rising costs of post-secondary education. Instead of pulling in the reigns and slowing down the deepening of our debt, the practice of lending more and extending the terms for repayment has prevailed. This certainly accounts for appearance of the 40-year mortgage in 2006 and the seven-year car loan. In both of these cases there’s a double whammy as the consumer pays incredible interest in addition to the purchase price. In all likelihood, those who need the 40-year mortgage or the seven-year car loan probably could not afford to buy the house or the car without these extensions. These detours from historically proven lending practices certainly contribute to a potential credit crunch.
The federal student loan program exceeds these boundaries by having a 10-year repayment plan that can be easily extended to a 15-year period. This is a staggering period of time to repay an unsecured loan and the cost to the students who couldn’t afford to attend university or college without the loan is mind boggling and guaranteed to prolong their poverty.
It is somewhat surprising to see no correlation being made between the costs of post-secondary education and the creation of more and more cash-strapped debtors. The last thing anyone wants is to see is any disruption in a well-greased gravy train for some educational institutions that routinely offload their annual increases and budget overruns onto the student population. The student loan program minimizes the sting of such increases as they simply lend more to accommodate ‘everyone’.
The credit crunch has many dimensions to it. One of the first things I learned in the early 1970s as a debt counsellor in British Columbia was this: the first step to resolving a debt problem is to stop borrowing. This might sound trite or simplistic but when you understand the full meaning of living without borrowing any more money, it is somewhat overwhelming.
The credit crunch in the USA has demonstrated there is a saturation point, a place where the credit system will falter. This hasn’t happened before, at least not since the advent of the more or less universal credit card and the internet. Now and in hindsight, the American experts are searching for causes and answers to how and why this all happened.
This gives us in Canada a preliminary advantage to commence a thorough review of our dependency upon credit and that going deeper into debt each year is simply not healthy or advisable. Student loans are a prime illustration of an attitude and a system of beliefs that has adopted a similar rendezvous with disaster by lending more and more and ignoring the costs of post-secondary education for its average and poorer citizens. It has also interfered with the social justice guarantee by eliminating all compassion for honest individuals who have an impossible burden of student loan debt by denying them access to bankruptcy legislation. This lack of empathy and understanding are a by-product of a revenue-neutral mindset that has narrowed the mandate and vision of government from the public interest to lending and collecting money.
Doug Welbanks is the author of “Julius Seizure: The Secret World of Bankruptcy, Debt Collection, and Student Loans” and “Finances After Separation: A Guide to Renewal and Success.” Welbanks was formerly BC’s director of both debtor assistance and debt collection. He can be reached at www.sandhillbooks.com