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CAUT Bulletin Archives

May 1999

Banks Take Aim at Students in Debt

A few years ago, the federal government announced major cuts in transfer payments to the provinces for health, post-secondary education and social assistance. Despite recent increases, these transfers still fall short of their 1994-1995 level.

At the same time, provincial governments were cutting grants to universities and approving significant hikes in tuition fees. Average tuition for undergraduate students in the arts, across Canada, has risen by more than 90 per cent over the past eight years, from $1,644 in 1990 to $3,179 in 1998. The increase has varied considerably between provinces, from 52 per cent in British Columbia to 113 per cent in Ontario over eight years.

During the same period, the cost of living, based on the Consumer Price Index, rose by 16.7 per cent. To meet increased demand for student loans, the federal government raised the ceiling for student loans a few years ago, but its good intentions have had a perverse effect.

The combination of rising tuition fees and other student expenses with low-paying jobs and high unemployment has driven growing student debt. The situation has been aggravated by the lack of a federal government scholarship plan based solely on student financial need. All these factors together have pushed average student debt to $25,000 at graduation, almost triple the 1990 level of $9,000. The Canadian Federation of Students claims that students in this country are among the most indebted in the world. Faced with a labour market characterized by declining job security, graduates will encounter serious problems in coming years with heavy student debt.

These factors have led to the growing phenomenon of student loan defaults. Financial institutions insinuate that growing numbers of students are not repaying their loans. It should be noted that since 1995, statistics on loan defaults have been compiled by the financial institutions, which refuse to release these figures to the public.

There are a number of reasons why students default. These include the actual amount of the debt, which may be so high that a graduate is unable to make repayment. Another possible cause is inadequate income after graduation, especially if a graduate is unemployed or does not have a secure job. It has also been shown that failure to earn a degree is a key factor in the likelihood of loan default.

Information available to students is another important consideration. Many students are poorly informed about the loans program. For example, only one third of student borrowers know about Canada's Interest Relief Plan. Financial institutions making student loans also appear to have a significant role to play in resolving the problem of loan defaults.

Finally, the type of educational institution also has an impact. The comprehensive Gross Gilroy study conducted in Canada indicated that at constant post-graduate income, college graduates defaulted at a rate 15 percentage points higher than university graduates, while graduates of a professional training institute defaulted at a rate 10 points higher still.

Some governments and financial institutions would like to make educational institutions responsible for loan defaults and are even considering "punishing" those with a default rate above a certain threshold. One "punishment" would be to de-designate an institution on the designation list. This is simply the list of public and private institutions whose students are eligible for a loan. These institutions are said to be designated.

In response to these developments, several organizations, including CAUT, called for consultations on loan defaults and the designation procedure.

The federal government has responded by setting up a Working Group on Designation and Defaults. This group consists of representatives from the federal government, the provinces, and associations active in the post-secondary sector, including CAUT.

The group held two intensive sessions in April of two days each. Unfortunately, there was a tendency at these meetings to blame post-secondary institutions and students for the problems related to student loan defaults. During these discussions, government spokespersons consistently denied that the government had any role in this problem.

At these meetings, the CAUT delegate, with representatives of organizations working in the public post-secondary education sector, argued that removing a public institution from the designation list was the equivalent of a death sentence for that institution; and that responsibility for loan defaults rests on the shoulders of many players, including students, governments, financial lending institutions, and finally, educational institutions.

A noted expert on student assistance has been commissioned to draft a summary report of the group's work, highlighting the many points on which there is agreement and those on which the parties have agreed to disagree.

The report will be released in mid-May and all working group participants will be able to respond at that time.

Translation of the article "Le défaut de remboursement des prêts étudiants."