Is Your Student Debt Sustainable?

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Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

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Student loan debt is a massive problem in Canada.  The average student loan debt resulting from a four year degree program is over $26,000, and a student could end up paying more than $10,000 in interest before the loan is repaid.

How Are Student Loans Treated in a Bankruptcy?

A government guaranteed student loan is only discharged in a bankruptcy if you have ceased to be a student for over seven years at the time you file bankruptcy. So it is very sad that 15% of our clients still have student loans at the time they file with us, meaning they’ve been trying to pay that back for seven years already.

Even worse, the burden of student loans are disproportionately felt by women.

What’s The Solution for Repaying Student Debt?

On today’s podcast I review the numbers, and discuss how student loan debt impacts society, and I give seven practical tips for dealing with student loan debt. Those tips are:

  1. Consider the end game. Ask yourself what type of job you can get when you graduate, and whether or not you will earn enough to repay your student loan.
  2. Research and apply for all possible scholarships and other assistance that’s available. A grant or scholarship is better than a loan, since they generally don’t need to be repaid.
  3. Beware of “front loading”. Many students qualify for scholarships or other aid in their first year based on their high school marks, but then not qualify in future years.
  4. Don’t borrow any more than you expect to make your first year out of college.
  5. Assess your chances at finishing the program on time, since your future earning power is directly tied to whether or not you graduate.
  6. Education is not something you go to school for, and then it stops. The world changes fast, so what you learn in college may be out of date very soon after you graduate.  Be prepared to keep learning.  Focus on continuing to improve your skills.
  7. Final point: be sure you fully understand what happens if you don’t pay your student loans.

Resources mentioned in this show: 

FULL TRANSCRIPT Show #158 with Doug Hoyes

is-your-student-debt-sustainable-transcript-2

I’m recording this edition of Debt Free in 30 in September 2017, just as the new school year is getting under way, and today I want to ask a simple question, with a complicated answer:

Is your student debt sustainable?

In the first half of today’s podcast, I’ll look at some numbers that show how big student debt is in Canada. In part two I’ll move on to some recommendations about how to deal with the problem – both as individuals and as a society.

The Canadian Federation of Students published a report in April titled The Political Economy of Student Debt in Canada, and they quote some scary numbers:

  • The average student debt for a four-year program is $26,300
  • Tuition fee revenue to post-secondary institutions has tripled since 2001.
  • Total interest paid by a borrower to the Canada Student Loans Program in financing $30,000 of student debt over 10 years (2017): $10,318.87

So if you complete a 4 year program, the average student ends up with almost $30,000 in student loan debt, and if that loan remains outstanding for the next ten years, you could end up paying over $10,000 in interest on that loan.

Statistics Canada published a study in 2015 that said that the median income, 3 years after graduation, of:

  • College students was $41,600 and
  • Of university graduates with a bachelor’s degree was $53,000

So if you complete a four year program, 3 years later you might earn, on average, $53,000, but you will have, on average, $26,300 in student loan debt, which is about half of your salary after three years.

These are of course average numbers; some people will earn more, some less, but those are still staggering numbers.

Let’s assume that on your $53,000 salary you have to pay 25% in income taxes, so that leaves you with say $40,000 in net income, or $3,333 per month.

Let’s say you can find a really inexpensive place to live, and your transportation costs are low, so perhaps you have $500 per month for student loan payments.

On your $26,300 student loan, with interest, that’s still around 5 years to pay it off, and that assumes you never lose your job, or get sick, or have any unusual expenses.

That’s a lot of money.

The high cost of student debt has many social implications.

If you have to live in a tiny apartment to save money to pay off your student loan, and if you’ll be paying your student loan for many years, what are the chances that you’ll be getting married and starting a family anytime soon?  Or buying a house, or even a new car?

And of course, there is the obvious result of high debt: bankruptcy.

As regular listeners to this podcast know, you can’t graduate from school one day and go bankrupt the next day to get rid of your student loans.

In Canada, we have a seven-year rule.

A government guaranteed student loan will only be automatically discharged in a bankruptcy if you have “ceased to be a student” for at least seven years before you file your bankruptcy or consumer proposal.  It’s not seven years from when you got the loan; the seven-year clock only starts ticking when you cease to be a student, which generally means the end of the last term you were a student, or when you graduated.

While I’m sure many former students would like to file a consumer proposal or bankruptcy to deal with their student loan debt, they can’t, unless they are willing to wait seven years for the automatic discharge rule to kick in.

But here’s the scary part: even with this seven-year rule, 15% of people who file a bankruptcy or a consumer proposal have a student loan at the time they file, and that’s up from 13% two years ago, so the situation is getting worse.

We compile these stats in our Joe Debtor study. That’s how I know that for our clients that have student loans, they still owe almost $14,000 in unpaid student loans at the time they filed for insolvency.  And again, remember that if student loans are the big problem, you’ve got to wait seven years before you can get bankruptcy protection. My clients have been attempting to make payments on their student loans for seven years or more before they go bankrupt. Many have already paid back thousands of dollars in student loans and interest.

So why do people go bankrupt?

Because they have no other choice.

  • But, you say: student loans generally have interest rates that are a lot lower than credit card interest rates,
  • the government has repayment assistance plans,
  • graduates got an education to earn a higher income

True enough but for many, this isn’t enough.

You can’t apply for a repayment assistance plan until you have been out of school for at least six months, and to be eligible, your loans must be up to date.

These repayment assistance plans may reduce your payments, but it’s also possible that even with the reduction in payments your repayment plan can last for up to 15 years after leaving school.

Unfortunately, repayment assistance plans are not a solution for many people. A lot can happen in 15 years. You can lose your job or get sick. Deferring payments doesn’t help get rid of debt, it just punts the potential problem down the road.

That’s all bad news, but I haven’t told you the worst part:

Student loans debtors are much more likely to be women.

Women owe more in student debt, are more likely to have a dependent, are more likely to be a single parent, and are more likely to be unemployed at least part of the time.

Here are the numbers: 

  • 62% of student debtors are women
    • 55% with dependent (34% males)
    • 35% lone parent (4% males)
  • $14,328 student debt ($13,071 males)

Student loans are a big problem for both men and women, but why are they an even bigger problem for women?

One reason is that, as the numbers show, women are more likely to have a dependent, or be a single parent, so they have added financial pressures that make student loan repayment more difficult.

Most of our clients are working at the time they file; 88% of males are working, and 80% of females are working, but that slight disadvantage for women, again, makes it harder to deal with their student debt.

I don’t have detailed statistics to prove it, but I suspect that having responsibilities for a dependent also has an impact on employment for women.

Of all our clients, 17% are the head of a single parent household, with an average of two dependents.

For female student debtors this ratio was 35%.  In other words, just over one third of women filing insolvency with student loans were single parents.

Single parents have household income below that of the average debtor, and that makes it more difficult for the single parent to support two dependents plus herself. Add student debt repayment on top of that burden and again, it is often the first payment to be pushed aside when prioritizing monthly expenses.

It is true that female debtors have less debt than the average for all of our clients, but with a lower and unstable income that makes it more difficult to service their debts.

Our average female client with student loan debt has only $282 available each month for debt repayment, so you can see why it’s very difficult to service over $14,000 in student debt, and all other debts, on that small amount of cash flow.

Based on these numbers, the answer for many former students to the original question: is your student debt sustainable, is “no”.

Those are the numbers, but this is not a story about math; it’s a story about people.

It’s obvious that there are an increasing number of students who get increasingly large student loans, and have great difficulty paying them off.

Our average client with student loan debt is 35 years old.  That means they have been trying to pay back their student loans for a long time, and they just can’t manage it.

Their student loans lead to other debts, which leads to even more debt, and finally a consumer proposal or a bankruptcy is their only option.

So what’s the solution?

For starters, I have long been a proponent of shortening the seven-year rule to something more reasonable.

In 2008, when Parliament was considering changes to bankruptcy legislation, Ted Michalos and I travelled to Ottawa and testified before the Senate Standing Committee on Banking, Trade and Commerce.

At that hearing, almost 10 years ago, I told the senators that our typical student loan debtor was a female, aged 37, with over $8,000 in student loan debt.

Well, here we are, in 2017, and our typical student loan debtor is still a female in her mid-30s, but instead of owing $8,000 in student loans, she now owes over $14,000.

Obviously, the situation has gotten much worse in 10 years.

I’ll post a clip from YouTube of my testimony in the show notes.

At that hearing, I proposed that the student loan discharge period, which at the time was 10 years, be shortened to two years.  The government did amend it from 10 years down to 7 years, but I didn’t think that was enough.

That was ten years ago.

Three years ago, in the summer of 2014, the government again reviewed bankruptcy legislation, and we again proposed a shorter student loan discharge period.

Since we knew, based on the results from our past testimony, that the government wouldn’t go for a shorter period like 2 years or 5 years, , this time we suggested the waiting period be for as long as the program of study, with a maximum period of 5 years.

So, if you took a four-year degree program, your waiting period would be 4 years.  A one-year program at a vocational school would have a one year waiting period.

The government ignored our suggestion.

So what do I think today?

I think you can make the argument that student loans should be treated exactly the same way we treat credit card debts, or income taxes: if you meet the requirements to file bankruptcy, your debts should be discharged.

However, I understand the counter-argument.

The knowledge you gain from an education is with you for the rest of your life, so it’s not fair that you just go bankrupt and eliminate your student loans.

Okay, I don’t fully agree with that argument, but fine, make it a two-year rule then, so that we don’t have a wave of new doctors going bankrupt the day they graduate.  I’ll suggest that to the government the next time they consider changes to bankruptcy legislation, which is currently scheduled for 2018.

But all of this talk about changing the bankruptcy rules is missing the point.

We are talking about treating the symptom, not the real problem.

The problem is that if, after you finish school, you can’t get a job that pays you enough to pay off your student loans, that means it costs too much to go to school!

Perhaps that’s the problem: school costs too much.

I’ll admit I’m an old guy.  I graduated from university 30 years ago, in 1987.  In my day, tuition only cost around $1,000 for a full school year.

Now I realize there has been inflation since then, but when I go to the Bank of Canada inflation calculator I find that $1,000 in 1987 is about $1,900 in today’s money.

I’m a Commerce and Economics graduate of the University of Toronto, so I went to their website and discovered that the first year tuition for a Commerce student is $6,400.

I also discovered that the tuition for years 2, 3 and 4 is over $16,000!

If you take one of the very difficult programs, like engineering, the first year tuition is over $14,000!

So how is it possible that I paid $1,900 in tuition for my last year of university 30 years ago, adjusted to today’s dollars, and if I was doing the same program today it would cost $16,000?

I’m no “rocket surgeon”, but it sure sounds like university is more expensive, and I doubt they are spending that much more on the students.  I don’t think the professors are getting rich either, so I assume that administrative costs and overheads are the reason for the much higher cost.

How can universities afford to spend so much more on overheads?

Student loans!

The government guarantees student loans, so the universities don’t care if their students get a good education and can pay back their loans; it’s not their worry.

When Ford Credit loans you money to buy a car, they want to make sure you can pay it back, or they may lose money.  That’s not the university’s worry, because it’s not their money.  If you don’t pay it back, they don’t lose anything.

So is the answer for the government to stop guaranteeing student loans?

That would certainly reduce the cost of education, because virtually no-one would be able to afford to pay the high fees without a student loan, but that would probably also mean that a lot of deserving students could not go to school.

Perhaps the answer is to penalize the universities if their students default on their loans.  That may encourage the universities to charge reasonable fees, and to do their best to ensure that they are offering worthwhile programs that will make their students employable when they graduate.

This is a complicated issue, and I admit that I don’t know how to solve the problem for society.

So I won’t.

But here’s what I will do:

If I can’t make the government listen to my suggestions, let me instead give you some practical suggestions that will help you, or your kids, stay out of the student loan quagmire.

Here are my seven tips for you, or your kids going to college, to keep student loan debt manageable.

First, and most importantly, consider the end game.  We get caught up in the emotion of graduating from high school, and we want to get started at college or university, so we think about what courses we will take, and where we will live.  That’s great, but we should also spend time thinking about what we will do when we finish school.

Will there be jobs available in the area I’m studying?  What do they pay?  Will I have any chance of paying off my student loans when I graduate?

Yes, I realize the there is intrinsic value in learning how to think and in learning how to manage as an adult while in University. But if I’m going to graduate with $50,000 in student loans, and it’s unlikely I’ll find a job in my field that can repay that debt, I should re-think my plan.

Think about the end, not the beginning.

Over the years I’ve met with hundreds of people with student loan debt, and in a lot of cases they never thought about what type of job they would get when they graduated, and I think that’s a mistake.

That’s the big picture; here’s some more specific advice:

Advice for students and their parents:

  1. Consider the end game.
  2. Research and apply for all possible scholarships and other assistance that’s available.
    1. The tuition may be $10,000 a year, but if you qualify for a $5,000 scholarship, that obviously reduces your costs.
    2. A scholarship or grant is better than a loan.
  3. Beware of “front loading”. Many students qualify for scholarships or other aid in their first year based on their high school marks.  But it is very common for your marks to decrease in second year, so you may not be eligible for academic scholarships in second year.  Universities know this, so they offer a good entrance scholarship to get you in the door. Be sure you understand the full cost, not just the cost of first year.
  4. Don’t borrow any more than you expect to make your first year out of college.
    1. This takes a lot of research, and at best it will only be a guess, but it’s a good benchmark. The more you expect to earn, the more you can reasonably repay, so there may be some justification for a higher student loan in a higher earning field.
    2. Stick with schools that will allow you to stick to that rule.
  5. Assess your chances at finishing the program on time, since your future earning power is directly tied to whether or not you graduate. You are at a higher risk of defaulting on a student loan if you:
    1. Switch programs part way through, and have to start over, or
    2. Switch colleges, or
    3. Take longer than four years to complete a four-year degree
  1. People with $5,000 in debt are often at greater risk than people with $50,000 in debt, because they are the people who didn’t complete their education, so they didn’t incur a lot of debt, but they also didn’t get the degree to allow them to earn more income.
  2. Education is not something you go to school for, and then it stops. The world changes fast, so what you learn in college may be out of date very soon after you graduate.  Be prepared to keep learning. Focus on continuing to improve your skills.
  3. Final point: be sure you fully understand what happens if you don’t pay your student loans.

This final point is important.  As I said earlier, you can’t just go bankrupt when you graduate and eliminate your student loans.  You are stuck with your student loans for a long time, and the government has the power to seize your tax refunds if you aren’t paying, so be sure you understand the implications.

If you are a parent, and you are co-signing a loan for your child, you are taking a risk, so again, be aware of the risks.

If you are listening to this show and you have already finished school, and you are struggling with your student loans, reach out for help.

Even if your student loans are not seven years old, you may have options.

My firm, Hoyes Michalos, has done thousands of consumer proposals and bankruptcies for people over the years with student loans, and in many cases dealing with all your other debts, like credit cards and bank loans, gives you the relief you need so you can manage your student loans.  So, even if your student loans won’t go away, there may be solutions.

I started the show by asking a simple question:

Is your student debt sustainable?

For many of our clients, the answer is “no”.  It’s impossible to pay back.

What’s the solution?

As a society we need to take a hard look at what we are getting for the money we spend on education.  Perhaps it’s not wise for governments to provide encouragement for everyone to get a four year degree by guaranteeing student loans.

I’ve tried, but I haven’t been able to convince the government to change the seven year student loan rule, so that means it’s up to you to take care of yourself.

This is a topic we will address many more times in the future, but for now, be sure you understand the rules, and make sure you pay attention to what will happen when you finish school, not just what happens at the start.

And finally, remember that you, or your child, are an individual.  You have to do what’s right for you.

If you want to be a doctor, you need to go to university.

But if you aren’t sure what you want to do, perhaps a better plan is to work for a year, or take some courses part-time, until you have a better idea of where your interests lie.  That way you gain some work experience, some time to consider your options, and you delay or perhaps avoid taking on excessive student debt.

That’s our show for today.

I’ll put full links to everything we discussed today in the show notes over at hoyes.com, that’s hoyes.com that’s h-o-y-e-s-dot-com, and a full transcript is also available.

Our website also has full contact information if you want to discuss your student loan options.

Thanks for listening.  Until next week, I’m Doug Hoyes, that was Debt Free in 30.