Advertisement
Money

Cancelling Student Debt Could Help Pay Your Rent. What if the Next PM Did It?

Forgiving federal government student loans could be a game-changer for a generation accused of failing to launch, and everyone stands to benefit.

by Anne Gaviola
Oct 11 2019, 10:00am

Photo via Canadian Press. EPA/EUGENE GARCIA

Climate change and health care may dominate the headlines, but education is the most important ballot box issue for millennials, according to the latest Ipsos poll. With two weeks to go until the federal election, one in four Canadians between the ages of 18 and 34 said education is the top issue that will determine how they vote.

Canadian students already owe $28 billion CAD in student loans to all levels of government, and this year’s crop is slated to add another $2.7 billion. Half of graduating students leave school in the red financially, with an average undergraduate debt load of $38,000.

So imagine what would happen if the next prime minister (or the current one) decided that Ottawa would forgive all federal student debt.

It sounds like wishful thinking, but that topic is already part of election discussions in the U.S., where two high profile Democratic presidential hopefuls, Elizabeth Warren and Bernie Sanders, are calling for student loan forgiveness.

In Canada, the Green Party is offering to cancel federal student debt, while the NDP is pledging to lift interest on student loans, and the Liberals are offering a two-year freeze on interest payments. Instead of focusing on debt, the Conservatives have pledged to increase matched-funding contributions for the Registered Education Savings Plan (RESP).

Wiping out student debt is a controversial proposition, but experts say it’s worth examining because ultimately, it stands to benefit all citizens, not just students. That’s because putting hundreds of dollars a month back into the pockets of young people who, arguably, need it the most, could be the kind of stimulus needed to lift a generation accused of failing to launch. It could enable young Canadians to start their lives earlier and start buying big-ticket items sooner. That kind of purchasing power has the potential to boost many industries. Plus, wiping out student debt would, theoretically, come back to government coffers in the form of sales and income tax.

According to UBC public policy professor Paul Kershaw, it’s the kind of move that could break the vicious cycle that many millennials find themselves trapped in. “We go to school longer to take jobs that pay thousands less per year, then face home prices that are way, way higher than in the past, weighing us down with heavy debts, crushing dreams of home ownership while making higher rents our consolation prize.”

Servicing that debt while dealing with the high cost of living in urban centres is increasingly difficult. Canada-wide default rates for student loans are about 10 percent, which is very high when you consider that the delinquency rate for consumer debt like credit cards is 1.2 percent and 0.24 percent for mortgage debt. Crippling student debt is part of the reason why millennials are the fastest-growing demographic filing for bankruptcy.

Investing in education

Free, compulsory high school education came into effect across Canada more than a century ago. Collectively, we decided that this kind of education was the bare minimum for getting a job, and that it should be made available to everyone, not just the wealthy. That move was based on the assumption that society benefits collectively from a better educated workforce and that this also promotes good citizenship and economic development.

The Canadian Centre for Policy Alternatives (CCPA) think tank’s senior economist David Macdonald says it’s time to consider whether a college or university degree is optional or necessary.

“It’s pretty clear that without a post secondary degree of some kind, whether it’s college or university, you simply can’t get a reasonable full-time middle-class job in Canada,” he said. “We certainly don’t say people in high school are getting a free ride because we consider high school one of the basics for employability.”

He says student loan forgiveness is the kind of a bold policy move requires a big public investment upfront, but the benefits are significant and long-lasting. Post-secondary graduates earn more money eventually, compared with their peers who only have a high school education.

“That four-year investment yields higher incomes not just for another four years but for that person’s entire life. So you get from age 30-65 of higher income tax for a four-year investment from say age 20-24,” said Macdonald.

Erika Shaker is the CCPA’s director of outreach. She has been monitoring trends in education for 25 years and says that kind of “massive cash injection” works out to $200-$300 a month—that’s what the average person pays to service their federal student loans. (You can use this loan repayment calculator to see what it would mean for you). They’d still be saddled with other debt—like loans from the provincial government and money owed to private lenders—so it would provide some relief, but not the kind of life-changing debt forgiveness that Shaker would like to see.

Crushing debt

Still, she says it’s a start. For young people, it has the potential to reverse the trend of putting their adult lives on hold until they can get a handle on their debt. “People are more likely to have to postpone major decisions like purchasing a home, starting a family, having kids. If you have debt you’re less likely to buy a house. If you do own a home, you’re less likely to own outright and you have less disposable income, less money to spend in your community,” Shaker said.

Although the earning potential is the same for graduates between the ages of 20 and 29, regardless of whether they have student debt or not, there are other significant differences. Home ownership rates are higher for those who aren’t burdened by education loans (60 versus 53 percent) and they also have a higher net worth ($62,000 versus $18,000).

In addition to that, people who have to take out student loans are more likely to be from less wealthy families. According to Macdonald, the current student loan system “perpetuates income inequality from parents to children, through a public program.”

In a time when precarious employment disproportionately affects millennials and Gen Z, Shaker sees the long-term benefit of allowing young graduates to be more selective about the kind of job they take.

“We are graduating students into this climate with significant levels of debt, so they’re starting off already behind the eight ball,” she said. “Eliminating that would increase people’s opportunities to be more innovative and take risks because they’re not deeply concerned about having to take whatever job they can get their hands on and cobbling together a livelihood with two, three jobs. Once you get on that treadmill, it’s really hard to get off.”

According to Shaker, allowing graduates to volunteer, start a business, take a job that is in their field of study rather than holding down several side hustles just to pay the bills, could change the fate of a generation.

A few hundred dollars of cash a month could go towards savings, investments, and retirement—creating a buffer that Macdonald says many millennials don’t currently have. This is important during a potential recession or economic downturn, where young workers’ jobs and earnings are usually hardest-hit.

There are other spinoff effects too. By reducing education debt, young graduates have more opportunity to do things like start their own business. Often the path starts with a mortgage.

“When you’re pushing towards opening a new store, coffee shop or restaurant, the largest asset that most households have is their house and the equity in that house,” he said. Macdonald points out that most small businesses fail within five years of starting, so it’s a risky move, but one that can spark innovation and create jobs if successful.

It’s not about passing the buck

The idea of wiping out or forgiving student debt is a tough sell politically. Critics say that giving up all that government revenue and trying to make up for it by raising taxes is risky. The impact of Ottawa wiping out federal student debt would immediately create a deficit of $18-19 billion in the first year, but MacDonald says it’s a one-time hit.

“The interest on that debt is already being paid by the feds, so the ongoing impact on federal revenue, expenditures and deficits after the first year is basically nothing, zero zilch,” he said.

The federal government runs the Canada Student loans program by creating a running tab of about $19 billion a year. As people repay that debt, it goes towards the tab, and as new loans are needed, they’re taken out of it. That tab is paid for by selling federal government bonds, which means that raising taxes may not be necessary.

However, eradicating student debt during a single prime minister’s term just means that the next cohort will face the same problems—there are no guarantees the next PM will do the same thing. There’s also the pervasive narrative that a ‘free pass’ will sap young workers’ drive to get into the workforce and encourages them to stay in school longer, thus creating a different kind of ‘failure to launch.’ Not to mention some former students who already paid off their debt may be less than sympathetic.

But it doesn’t have to be, according to Shaker. She says it’s a matter of changing the narrative around it—that it isn’t letting young people off the hook, but rather that making higher education truly affordable for everyone is a priority as a society. Shaker says a progressive tax system, where those who are making more are paying more, is part of the equation.

“I’d like to see the recognition that this is not about wanting something for nothing or wanting to shirk responsibility for paying. It’s about changing when you pay and how you pay and how you make that payment structure more fair, more equitable and in greater recognition of what people can afford,” she said.

Campaign promises

Federal spending on education is about $10 billion annually, and the Green Party’s education promises plan are the most generous of the four major parties. They include free post-secondary tuition, which comes at a cost of $16.4 billion in the first year, according to the Parliamentary Budget Officer which is Canada’s national budget watchdog.

The Greens’ platform, as outlined by party leader Elizabeth May, also includes forgiving some of the existing student debt owed to the federal government, as well as $10 billion towards trade schools.

Putting a price tag on the NDP’s offering is more difficult because it’s a multi-year plan, which will start with abolishing all interest on federal student loans on Day 1. The Liberals have collected $3 billion in interest over the past four years, so that gives us a ballpark number. It also proposes working towards free tuition by replacing loans with grants that don’t need to be repaid.

NDP leader Jagmeet Singh pledged to cap and reduce tuition fees with the goal of “making post-secondary education part of our public education system.”

Liberal Party leader Justin Trudeau has said that their post-secondary plan will cost $280 million in the first year and increase to $1.4 billion by 2023. Pledges include freezing student loan repayments, interest-free, for new parents until their youngest child is five.

The Liberals are also promising to boost the amount given out as federal grants by 40 percent—which can work out to up to $1,200 more per year.

The Conservatives propose $288 million in additional funding, earmarked for more grants for students from low and middle income families, and allowing students with education loans to earn more while they’re in school. Party leader Andrew Scheer’s plans include a pledge to boost the RESP from 20 to 30 percent for every dollar invested up to $2,500 a year, effectively boosting the maximum annual grant to $750 from $500.

It’s complicated

There’s no getting around the fact that in the unlikely event that the next prime minister decides to forgive all federal student debt, it won’t be enough to wipe out the financial burden of higher education for everyone. Provinces are still not forgiving loans that they’re owed, neither are banks and other private lenders.

And although the national average for undergraduate tuition fees declined this year from last year—they remain at or near record levels. The average cost of an undergraduate degree is 30 percent more than it was a decade ago. Provinces can cap, freeze or limit how quickly these types of costs can increase.

There are also other fees associated with higher education, for things like athletics, student health services, clubs and student organizations and those are about $900 a year.

What Kershaw wants to see from party platforms is a commitment to rein in tuition costs without compromising funding for universities. He is the founder of Generation Squeeze, an advocacy group for young people. And while he concedes that forgiving interest on student debt would help out many millennials and Gen Z, he’d like to see policy that makes the connection between graduating with record levels of debt, and the high cost of living.

“Younger adults would be far better served by a real plan to reconnect home prices to earnings, and family policy that makes time at home affordable when we start our families, followed by child care that is affordable so we can be in the labour market enough to pay higher rents and pay down student debt,” he said.

Follow Anne Gaviola on Twitter.

Tagged:
News
JUSTIN TRUDEAU
Conservatives
liberals
canadian news
NDP
elizabeth may
Jagmeet Singh
Andrew Scheer