It can be extremely easy for students to get in over their heads
Troy Media – by Will Van’t Veld
The benefits of higher education are well known. Not only do graduates tend to benefit personally from higher salaries, but the societal benefits of a highly education population are large as well.
Unfortunately, there is a cost to these benefits and concern over student debt levels is warranted, especially if interest rates rise.
Over the past decade, Canadians have become increasingly comfortable with debt. Most of the debt has been housing related, but student debt has been accumulating quickly as well. The federal government raised the national student loan debt ceiling by $10 billion in 2000, to $15 billion; but as the ceiling was to be breached by 2013, the government had to increase it again, this time to $19 billion.
Student loans dependent only on financial need
There is a fair amount of government involvement in both mortgage and student debt because of the perceived social benefits that come from having high levels of home ownership and a well educated population. There’s a key difference, however, in how the financial aide is given: housing debt requires certain minimum under-writing requirements (such as debt service ratios, down payment, income verification and credit scores) to qualify for government backed mortgage insurance. But student debt is dependent mostly on financial need and nothing more.
Most Canadians qualify for student loans by being born in Canada and not having exceptionally wealthy parents. This is one of the great things about being Canadian, but it can also make it extremely easy for students to get in over their heads. The onus is on the student to borrow prudently, taking into account future employment opportunities. Meanwhile, the government protects itself the only way it really can, by making bankruptcy extremely difficult to obtain (there’s no collateral as there is with a housing loan).
Everyone has heard the stories of the student who partied away her loan money, or who graduated with a degree that didn’t result in a high paying job. For others, the investment paid off in spades, resulting in stable, high income employment. Hopefully there are far more of the latter than the former. But with the average student debt approaching $30,000 (according to the Canadian University Survey Consortium), it’s clear that the odds of financial difficulty brewing for many graduates down the road is increasing.
According to a study done for the College Board in the United States in 2006, the level of student debt that is prudential upon graduation varies. Traditionally it was thought to be around 8 per cent of gross income, but the authors highlight that a figure as high as 10 per cent was also reasonable. This means with 8 per cent-10 per cent of gross income being dedicated to student loan repayment, other basic expenditures aren’t expected to be sacrificed (i.e. housing, getting married, etc.).
The good news is that if the typical student with debt today graduates with $30,000 in loans, then as long as she earns between $40,000 and $50,000 in her first years of working, she’s operating within the prudential limits highlighted by the College Board (i.e. debt service of between 8 and 10 per cent of income). This isn’t completely unreasonable for many graduates after a few years of working, but it’s obviously entering a territory in which it is concerning.
Watch for interest rate increases
The problem is if interest rates went back to where they were five years ago, the “prudential range” goes up to $45,000 to $55,000 and we’re moving deeper into the disconcerting range. While this range might still be at the low end for many engineering, nursing and business graduates, the same can’t be said for graduates in the non-specialized fields (especially if they aren’t in Alberta).
It’s difficult to generalize when talking about student debt, as everyone’s position is unique. That said, student debt levels in a low interest rate environment can engender a false sense of financial security. This should be a concern for a growing number of students and Canadians alike.