Investment in the future

Higher education brings short-term financial pain, long-term gain


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At the start of every school year the same debate seems to simmer at the forefront of public consciousness: post-secondary education funding.

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Hey there, time traveller!
This article was published 17/09/2011 (4037 days ago), so information in it may no longer be current.

At the start of every school year the same debate seems to simmer at the forefront of public consciousness: post-secondary education funding.

Students like Marakary Bayo, an international student and the Manitoba chairman of the Canadian Federation of Students, would also like the issue to be at the forefront of the provincial election campaign.

And thus far, the federation has heard some hopeful campaign promises from the parties. All parties have promised to freeze tuition at the level of inflation, among other goodies.

Campaign promises are one thing, but Bayo says politicians’ actions after they’re elected are another. Still, he says the federation is hopeful for a freeze for all students, including international ones who bore the brunt of tuition increases over the last decade while domestic students enjoyed a freeze on rates until 2008. Since then rates have risen by about 10 per cent.

Bayo says the federation wants a broader policy change, moving away from tuition funding about 35 per cent of post-secondary education costs. Instead, it wants increased funding from government — essentially the taxpayer — to lower education costs for students because the federation contends education is a right, not a privilege for those with financial means.

“We want accessible and affordable education for all, and to do that, we believe the best way is to reduce tuition fees, or at least if they cannot reduce them, they can freeze it.”

Recent statistics and reports — from Canada’s big banks, no less — seem to support the argument that the pursuit of higher learning is a financial burden for students.

According to a recent RBC survey, more than a third of college and university students in Canada expect to have significant debt after graduating and more than 50 per cent worry about having enough money while completing their degrees.

Furthermore, a TD report released earlier this week stated that a four-year degree in Canada for a student living at home costs on average about $55,000.

For would-be students over the coming decades, those costs are expected to increase at a rate faster than inflation. In 18 years, a four-year degree for a student living at home will cost more than $102,000. Adjusting for inflation, that’s $68,000.

But the TD economic report was not intended to be a downer for current and future students. In fact, it highlighted that despite the costs and the current soft labour prospects for graduating students, university education offers students a good long-term return on their investment — that being a loan for about half of full-time students attending college of university in Canada.

“Primarily, we argue that students have to recognize an investment in higher education is really a long-term one and the debt burden will subside as it gets paid off and incomes rise in tandem with experience,” says Shahrzad Mobasher Fard, an economist with TD.

The report states workers with a degree, certificate or college diploma earn more than double the after-tax income over their lifetimes compared to workers without a high school diploma, and almost double that of those who have only a high school diploma.

Furthermore, their overall debt burden is not unmanageable — at least from the perspective of a loan officer at a bank. Banks worry about customers when their debt-servicing ratio exceeds 40 per cent. That is when 40 per cent of the income they earn goes toward making debt payments. For many students, the ratio is under 10 per cent. Those numbers, however, only include government-issued student debt and exclude private debt issued by financial institutions.

Fard says data on the loan books for banks typically is not publicly disclosed, but she estimates the private-debt component would likely add a couple of percentage points to the debt-servicing ratio numbers.

RBC branch manager at Pembina and Oakenwald Maxine Gromnisky says lines of credit for education are indeed very popular products.

They have been for several years, but she says the size of the loans has been going up as tuition costs have increased. While they’re not interest-free like government loans, the rates offered by banks while students attend school are on par with a home-equity line of credit. A student line of credit is prime plus one per cent, and students enrolled in professions like dentistry, medicine and law can get a line of credit at the prime lending rate.

Once their education is complete, the interest rates often increase to a rate similar to government student loans. At a floating rate, that is prime plus 3.5 per cent or eight per cent at a fixed rate.

Compared to other “good debt” like a mortgage, student loan rates are higher, because the debt is unsecured. No default rates exist for student lines of credit, but government student loan default rates are about 14 per cent on average. According to federal government data, those rates have been falling over the last decade for the most part. Still, graduating students face a significant debt burden. Overall student debt in Canada, excluding private bank loans, is about $18 billion. About $13 billion of that is from the Canada Student Loans program, which has issued about $32 billion in loans since it started in 1964.

Many financial institutions and even non-profits are no doubt aware post-secondary students need help. You need look no further for proof than the plethora of literacy material they’re offering. Many organizations have developed extensive financial-management websites and other educational material to help students. The Investor Education Fund, sponsored by the Ontario Securities Commission, has one of the more robust online resources for students.

Its website,, has a large section on financing post-secondary education that includes loan repayment and cost-of-living calculators. The funds’ president Tom Hamza says the information aims to provide a comprehensive view of the financial implications of post-secondary education and its costs.

It’s one thing to know what you want to study and the associated costs, he says. “But understanding that in the context of what the full implication and cost of the education will be is even more important.”

Given that as both federal and provincial governments are grappling with deficits today and in the near future, it’s unlikely that post-secondary costs will be decreasing, and much more probable that reliance on loans will become even more common.

Still, the short- to mid-term pain amounts to a long-term monetary gain in most instances — a fact that often gets obscured by the debt students are looking at while in school and the shoddy economy today, says Fard of TD.

“Given that backdrop and the high tuition fees, it doesn’t really make a lot of economic sense to pursue a higher education, and what we did is confront that claim and we presented a number of reasons why.”

Quick facts:

The earlier the better: For parents who plan to help pay for their children’s education, there’s no time like the present. The Registered Education Savings Plan (RESP) is a popular university-savings vehicle for many clients, says RBC’s Maxine Gromnisky. Contributions to investments within the plan can grow tax-free until they’re needed to fund post-secondary education needs. At that time, withdrawals are taxable, but they’re taxed as student income so it’s more likely that taxes will be non-existent or negligible. The tax savings, however, are the secondary benefit of the plan. Contributions are eligible for the Canada Education Savings Grant, a 20 per cent grant from the government to a maximum of $2,500 in contributions per year. That amounts to $500 in grant money per year to a lifetime maximum of $7,200. Furthermore, low-income families earning less than $41,544 net a year get an additional $100 in grant money on the first $500 they save per year. Families earning between $41,544 and $83,088 can also receive an additional grant, $50 on the first $500 they save per year.


More help for low-income families: The federal government also offers the Canada Learning Bond for low-income families receiving the National Child Benefit Supplement for children born in 2004 and after. The bond is a $500 contribution to an RESP with an additional $25 to cover fees associated with opening an account. An additional $100 per year is available until age 15 so long as the family still qualifies as low-income.

Student loan help: Canada Student Loans is the federal assistance loan program that provides 60 per cent of the government-subsidized, interest-free loans while full-time students are in school. Once they stop studies full-time, interest starts accumulating, but they are not required to make payments until six months after leaving school full-time. The maximum loan payment is $210 per week to a maximum of $7,140 per year. Manitoba Student Loans provides the remaining 40 per cent for full-time students with the same rules of repayment applying. The maximum loan is $140 per week to a maximum of $4,760 per year.


Student grants: Students from low-income families can receive grants of up to $250 a month to a maximum of $3,000 per academic year. Students from middle-income families can receive a grant of $100 per month to a maximum of $1,200 per academic year. Students with dependents under age 12 can receive $200 a month per child. (Government of Manitoba website)


Need help repaying a student loan? The federal government’s CanLearn site has a section dedicated to problems repaying loans, including information on the Repayment Assistance Plan. For former students facing financial difficulties in repaying their debt, the plan offers a few options including affordable payments on principal while the government covers the interest. In extreme cases, the government will cover some of the payments on the loan principal as well. For more information, call 1-888-815-4514.

Real return on education costs — a rebate for tuition: Former students who work in Manitoba after graduation are eligible for the Manitoba Tuition Fee Income Rebate. Students graduating in 2007 and after can apply for a tax rebate of up to 60 per cent of their tuition costs to a maximum rebate of $25,000. Those who are currently studying in Manitoba can get some of that rebate while in school. They can receive a five per cent tax credit on tuition fees. That can be as much as a $500 rebate per year with a lifetime cap of $5,000. (

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