Rising student debt burdens are a myth

The burden of carrying an average loan with an average salary has fallen by more than a third
Tim Krochak

Everyone talks about “rising student debt burdens” as if they’re real. But they are not. In fact, the burden of carrying a student loan has fallen significantly over the past decade.

Some of the confusion is understandable: student debt levels do tick up slightly every year, more or less in line with inflation. But a debt burden isn’t just about debt levels. A $20,000 debt is a lot easier when you’re paying 5% interest than if you’re paying 10%. And it’s a lot easier if you’re earning $60,000 than if you’re earning $40,000. That’s why when calculating how difficult a loan is to repay, you need to take things like graduate’s income, interest rates and tax rates into account.

So, how have all these things changed for students over the past couple of decades?

Let’s start with what’s happened to student debt. This did indeed rise very quickly throughout the 1990s; costs rose quickly, student lending rose even faster and many provinces got rid of their grant programs. As a result, debt roughly doubled between 1992 and 2000. But since then, student borrowing levelled off in real terms and since 2009, it seems to have fallen. Partly, it was the result of increasing federal expenditures on grants—first through the Canada Millennium Scholarship Foundation and later through the provinces replenishing funding for their grant programs. As the decade wore on, the effects of increased savings that were catalysed by the creation of the Canada Education Savings Grant probably had an effect; so too did increasing disposable family income as taxes fell in the 2000s (a process hastened by a massive increases in tax credits for education between 1996 and 2000). So while the rhetoric on student aid has always been about debt reaching new highs, in fact, the most recent evidence we have suggests it’s actually declining.

 Figure 1: Average Student Debt at Graduation, Among University Graduates Who Borrowed, 1986-2012, in 2013.

Source: 1986 to 2005, National Graduates’ Survey; 2012, Canadian Undergraduate Survey Consortium Survey of Undergraduate Students

Second, let’s look at what happened to graduates’ income. Until recently, we have had a pretty good national time-series of graduates’ income two years after graduation through Statistics Canada’s National Graduates’ Survey. Because Employment and Social Development Canada (formerly Human Resources Development Canada) has been jerking Statscan around on funding for this survey for most of the past decade, we no longer have such a great time-series. But we can project trends out since 2005 using some new provincial surveys and we include our projection for 2012 below based on known data from 2005-2012.

Figure 2: Average Graduate income 24 months after graduation, by graduating class, Canada, 1986-2012, in 2013

Source: 1986 to 2005, National Graduates’ Survey; 2012 is the 2005 NGS number indexed upwards by weighted known rates of increase in British Columbia and Ontario up to 2012

Then there are student loan interest rates. These are linked to the prime rate—since 1995, the rate used by most students has been prime rate plus 250 basis points. Now, nobody seems to remember this, but during the early 1990s, when we had the triple-whammy of the peso crisis, the sovereignty crisis and an inflation-obsessed John Crow as Governor of the Bank of Canada governor, our interest rates were regularly 400 basis points higher than the Americans’. Since then, they’ve come way, way, way down. In 1991, prime briefly hit 14%, and throughout the 90s it averaged about 7.5%. Today it’s 3%. That has a huge effect on what students pay today.

Finally, there’s the issue of taxes. Today’s students won’t remember this, but our governments went through a lot of tax cutting in the late 1990s and early 2000s. Someone with average graduate income 2 years out of school , paid out 28% of their income in taxes in the early 90s; today, because of those cuts, they’re only paying 22%

In other words, things were indeed pretty bad for students in the 1990s. But since then, most of the relevant forces which underpin student loan burden have been heading in the right direction: debt is stable, interest rates are down, taxes are down, and income was more or less stable but for a recent blip. Put it all together and what you see is that the after-tax repayment burden for someone with average student wages repaying an average-sized student loan has fallen sharply in the last decade:

 Figure 3: Percentage of Average After-tax Earnings of Graduates 2 Years Out Required to Service an Average Student Loan

As figure 3 shows, the burden of carrying an average loan with an average salary has fallen by more than a third since the turn of the century. It’s now actually back down to where it was in 1992, before the rapid rise in tuition and debt of the 1990s.

Does that mean everything is rosy? No. These are average salaries and average debts, but there is considerable variation around the mean. In the maritimes, where graduates have above-average debts and below-average incomes, the burden remains well above the national average. But it does mean that on the whole the situation is getting significantly better for most students.

And for those who still have a very heavy burden, the other development not shown on these charts is protection afforded to low-income borrowers. Until 1994, borrowers could only access government repayment assistance (then called “Interest Relief”) if they were unemployed and then only for a maximum of 18 months. After that, it was then extended to borrowers with low-incomes, and its terms were made more generous again in both 1998 and in 2007. It is today much easier to qualify for relief than it was in 1994 and the protection now lasts for the life of the loan as well.

Not all of this improvement in student loan burdens is due to improvements in student aid per se; indeed, much of the credit is due to much more generalized macro-economic conditions like interest rates and taxes. Be that as it may, as long as those things stay more or less unchanged, we aren’t likely to see student loan burden conditions returning to their early-00s conditions any time soon.

Alex Usher is the President of Higher Education Strategy Associates. You can reach him on Twitter: @AlexUsherHESA