Ask any accountant or business analyst: the juicy material in annual reports and corporate filings is usually not what you see headlined on the first page of the document. It’s generally buried. Or hiding in plain sight. So it is with the recently released annual actuarial report on the Canada Student Loans Program. The report is built on the rather newsworthy but largely overlooked assumption that Canadian university and college enrolment will start shrinking as of next year, and go right on shrinking steadily, all the way to 2026. By the time the great contraction is done, Canadian campuses will have 18% fewer full-time students. The audit was performed by the Office of the Superintendent of Financial Institutions, or OSFI, a federal oversight agency.
The Star was the only major media source to pick up and run a story on the CSLP report. But The Star focussed, not surprisingly, on CSLP’s first order of business, namely student loans. The actuaries expect that tuition will rise 3% faster than the rate of inflation, such that average full-time tuition in 2031 will be $19,000, up more than 200% from this year. And the CSLP program will, as a result, become larger and more expensive, with more students requiring loans, and with average loan amount growing larger. A little over one-third of Canadian student rely on CSL loans now; by 2031, the report estimates that slightly more than one-half of students will be taking out a CSL loan to help pay for higher education.
But the bigger story, with a rather significant impact on the post-secondary sector and the country, went largely ignored. The auditors expect full-time, Canadian post-secondary enrolment—which has been climbing for a couple of generations—to peak next year at 985,000. Student numbers, the auditors assume, will then slowly but steadily fall until 2026, when Canada will have 805,000 post-secondary students. That’s a drop of 180,000 students or 18.3%. How big is that? This big: It’s equivalent to shutting down every public university in Manitoba, Saskatchewan, Alberta and British Columbia.
(Not something I’d recommend; just trying to give a sense of the magnitude of decline in student numbers that OSFI is talking about. Note that these post-secondary enrolment numbers include both colleges and universities; presumably both colleges and universities will see enrolment drop. So don’t start selling off the U Calgary campus to real estate developers just yet).
OSFI’s actuaries are just the latest debating squad to join the “Canadian universities: growing or shrinking?” debate. We’ve seen the Council of Ontario Universities, the lobby group for Ontario’s universities, predict massive enrolment growth in the province over the coming decade. The four universities in the Greater Toronto Area last year similarly said that they were bursting at the seams, and the future would bring so many new students that the city would need another university. At the same time, however, the Maritimes Higher Education Commission said that universities in Atlantic Canada could see enrolment shrink by 14 per cent in the near future, because the number of young people in Atlantic Canada is falling. Last year, the Millennium Scholarship Foundation and Statistics Canada similarly noted that the pool of university-age (and college-age) Canadians is about to shrink sharply. Absent a substantial increase in participation rates—the percentage of young people in higher education—that should spell many thousands of fewer students at Canada’s colleges and universities. The fact that OSFI’s actuaries have joined this debate unwittingly, and from a position of disinterest—they’re just financial institution supervisors, trying to understand whether the CSL program will remain solvent in years to come—is a powerful argument in favour of taking their conclusions seriously. They aren’t biased one way or the other.
Are OSFI’s numbers right? Is enrollment really going to fall by nearly 200,000 students? Maybe not. But I tend to think that the thrust of OSFI’s numbers describes the most likely future, for a couple of reasons. First of all, OSFI assumes that a declining population of young people means that there will be fewer people available to go to university. COU and the Toronto-area universities argue that fewer young people will nevertheless translate into more students, due to a higher percentage of that smaller population going into higher education. The latter prediction might come true, but the OSFI assumption is the one that follows the path of least resistance. Two minus one equals one is the more likely outcome than two minus one will eventually add up to three because, trust us, we’re going to find another two, somewhere.
OSFI also assumes that, because of the retirement of the Baby Boomers in the coming decade, there is going to be a labour shortage. Again, this is a common economic assumption and with good reason. A labour shortage means additional incentives for young people to get into the labour force sooner, rather than forgoing income and staying in school. There are more jobs and higher wages, there for the taking. In a period of labour shortage, the market incentives don’t encourage people to take themselves out of the labour force; they encourage more people to get into the labour force.
We have lots of historical experience with this sort of thing: in recession times, you often see higher university enrolment; in tight labour markets, you have often had somewhat fewer new university and college students. An editorial a couple of weeks ago in the Calgary Herald complained that Alberta has a low university participation rate. “With all its oil wealth,” wrote the Herald, “[Alberta] has the lowest university participation rate.” What the Herald missed was that Alberta’s low university participation rate may be in part caused by that booming economy and the high wages, ultra-low unemployment and in some cases extreme labour shortages that have come with it. Alberta’s economy is drawing in a huge number of—young, working—immigrants. If a 21-year old from New Brunswick moves to Alberta for a $100,000/year job in construction, that pushes up Alberta’s population of young people. Same goes for a 21-year old from India. Their arrival pushes down the province’s post-secondary participation rate, because both are in the labour force rather than in school. And that’s not even counting all of the young Albertans who are similarly forgoing post-secondary or leaving early to enter the labour market, because of the jobs available to them in a boom economy.
Whether you think that’s a good thing or a bad thing or simply a largely logical and expected thing (I vote for number 3), the OSFI study assumes that what has happened at times in the past and is happening in Alberta–labour shortages and low unemployment levels leading to a somewhat diminished post-secondary participation rate—is what is likely to happen in a future where there are more old people and fewer working-age people. There’s no guarantee that this is what the future will hold, but it is a very plausible outcome. It’s the high percentage shot.
And it calls into question the assumption that the university system needs to be expanded to accommodate huge growth in student numbers over the next generation. That’s just not likely to be the case.
Some other interesting wrinkles in the OSFI actuarial report? OSFI projects that tuition will increase by 3% more than inflation over the coming generation. Given the historical record—education is one area where the product has not become cheaper over time; unlike, say, computers, television sets and cell phone service—that’s a reasonable and maybe even conservative assumption. And it means that tuition is projected to hit a whopping $19,000 in 2031. However, that projected tuition increase isn’t as large as it seems, because it doesn’t take inflation into account. So what happens when you take inflation into account? If you factor in an inflation level of 2% from now until 2011 and 2.5% from 2011 to 2031 (CSLP assumes 2% until 2011 rising gradually to 2.5% by 2015), then multiply that by what OSFI says is the current approximate average tuition level ($6,000), you discover that $6,000 in tuition today is equivalent to $10,433 in inflated, 2031 dollars. The gap closes further when you consider that the average wage—which has historically grown a bit faster than inflation—is likely by 2031 to be something in the neighbourhood of double or more what it is today. So, assuming no new government tuition-reduction schemes, university tuition will be relatively more expensive and less affordable than it is today. But only somewhat so, not massively so.
What does OSFI expect higher tuition to mean for Canada Student Loans? More borrowers, borrowing more money.
The number of students receiving a CSLP loan is expected to increase from 345,000 to 430,000
over the projection period. This represents an increase in the loan uptake of students in
post-secondary institutions from 36% to 52%. Such an increase in participation in the Program
is mainly a result of rising student need. This need is affected by the projection of tuition fees
and other expenses, which increase at a faster rate than resources. Contrary to the past two
decades, the number of students enrolled in post-secondary institutions is not a contributing
factor to the increase in the cost of the Program, as fewer students are expected to enroll in
post-secondary institutions over the projection period. Instead, it is rising student need that
mostly contributes to increasing Program costs.
But here’s the big surprise: more student borrowers, each borrowing more money, won’t make the CSL program less affordable to the federal government. In fact, the existing program will be far more affordable and relatively less costly to the taxpayer. Why?
The total net cost of the Government’s involvement in the CSLP, which is the difference
between expenses and revenue, is expected to grow from $0.7 billion to $1.2 billion over the
projection period. This represents an average annual increase in the cost to the Government of
In other words, the cost of the CSLP is going to increase at about 2.3% a year, or about the rate of inflation. The report doesn’t say this next part, but it’s something everyone knows: government tax revenues and Gross Domestic Product are going to increase faster than inflation—a lot faster than inflation. (Unless we assume zero economic growth for the next 25 years, incomes and GDP and tax revenues will rise faster than the rate of inflation). All other things being equal (assuming no big new tax cuts, for example) the government of Canada will be devoting a lot less of its resources, and a lot less of the country’s total wealth, to Canada Student Loans—even if the loans program covers more students and lends them more money, as OSFI suggests it will.
All of which should, in one sense, make student loan reform advocates happy. Pitching changes and improvements to the system is only going to get easier. If OSFI is right, as each year passes it will become relatively less costly for a future federal government to be more and more generous with student borrowers. If OSFI’s actuaries are right, the relative cost of converting more Canada Student Loans spending from loans to grants, reducing or eliminating interest, or forgiving more borrowers who find themselves unable to pay is only going to get cheaper.