The Canadian National Newspaper: Canadian student loans: the “Jekyll-and-Hyde approach”

As thousands of post-secondary students swarm Canadian universities and colleges to broaden their horizons and pursue their dreams, the 350,000 who rely on government loans annually might want to make sure they can pay them off quickly after graduation - lest they fall out of favour with provincial or federal loan programs.

Most studies show that investing in post-secondary education offers one of the best returns-on-investment for governments; nevertheless, students continue to be burdened by rising debt levels - making it increasingly difficult to start their adult lives after school. A recent graduate survey found that many are completing their studies with numerous forms of debt, including government loans, credit cards, and student lines of credit. Canadian governments are making matters worse by charging student loan borrowers sky-high levels of interest.

In a recent editorial, a respected researcher for the Educational Policy Institute suggested that Canada’s student loan system employs a “Jekyll-and-Hyde approach” to lending. That is, Canadian students pay no interest on loans while they are in school, but are expected to pay thousands of dollars in compounded daily interest charges once in repayment.

An average debt of about $27,000 dollars upon graduation, for example, comes with interest charges of well over $13,000 dollars based on a standard ten-year repayment period. At the current interest rate of 2.5% above prime on floating-rate loans (or 8.75%), and 5% above prime on fixed-rate loans (or 11.25%), it might surprise Canadians to learn that the federal government is charging more than double the rate it actually pays to acquire the funds - (about 4.25%).

Canadian student loan repayment policies also favour wealthier graduates. For example, those who complete degrees in higher-paying fields, such as business, law, or medicine, are often able to pay off their loans faster than those who obtain jobs in lower-paying professions. In other words, the poor pay more.

In contrast to Canada, most other developed countries have lessened the repayment burden for graduates. Student loan borrowers in the United States, the United Kingdom, the Netherlands, Australia, and Sweden all pay far less in interest than Canadians -- usually under 4%. Meanwhile, graduates in repayment in New Zealand and Germany do not pay any interest at all.

But while the Canadian government still lags far behind most other countries in the developed world when it comes to interest rates on loans, some provincial loan programs are starting to pave the way. In Nova Scotia, for example, student loan interest rates have recently dropped to the government’s cost of borrowing (about 5.25%), while Newfoundland and Labrador has announced a rate cut from 8.75% to 6.25% on floating-rate loans. Meanwhile, Ontario charges one point above prime, with P.E.I. charging 2% above prime. Most other provinces, however, are charging the same rates favoured by the feds -- 2.5% above prime.

Interest charges are only one part of the problem, though. Canada’s patchwork-approach to financial aid has also created a labyrinth of rules and regulations which entangle students every year. According to the federal government, almost 9,800 calls were escalated to supervisors at the National Student Loan Service Centre in 2005/06, with 149 borrowers heading straight to their Members of Parliament for help in 2006. Borrowers should have access to an Ombudsperson for help with their loan problems when the system fails them. 74% of Canadians recently polled on this question, agreed.

For those who struggle with their loan payments after school, more flexible debt reduction and interest relief programs should be made available, along with improvements aimed at streamlining our cumbersome loan bureaucracy. The feds should also reinstate the six-month interest-free grace period following graduation, along with the provincial programs that did so years ago (only three provinces currently maintain an interest-free grace period for students). Reinstating this measure would ensure borrowers have enough time to find work before commencing repayment.

For those who risk falling into default, governments must be more proactive in finding ways to help borrowers, instead of investing so much money in the hiring pit-bull collection agencies; the federal government alone is said to have signed contracts worth about $180.8 million on the collections of student loans. It is no less distressing the feds continue to vigorously pursue the collection of student loan interest charges on defaulted loans -- to the tune of $421 million dollars.

Let’s modernize and simplify the financial aid system, so that the next generation of graduates can concentrate on their studies instead of battling bureaucratic red tape and sky-high interest policies.

About the author:

Julian Benedict is the Founder of the Coalition for Student Loan Fairness, internet site: www.studentloanfairness.ca.