General Goals 1) to be debt free in 3.5 years 2) save lots of money

## Wednesday, June 8, 2011

### The Ripple Effects of Student Debt

I have never been fond of the \$26,680 student debt number. This number is used to indicate  the max amount of student debt a student will insure after coming out of university after a 4 year degree after taking the max amount of student loans. In my case that would mean OSAP.  So theoretically that means that my max amount of student debt should really only be \$26,680 and of course in my case this isn’t true. I had significantly MORE student debt that that.  So how do they generate this number? Basically they take the max amount of OSAP (for Ontario students) and multiply it by 4 (average amount of time to do 1 post secondary degree) than, if you get full OSAP 33% of that money is treated as a grant and ‘paid back to your student loan amount for you.’ To keep the numbers simple lets assume that the max OSAP is \$10,000 a year, is a bit less than that in actuality. So \$10,000 X 4years = \$40,000 student debt. Of course this number dose not includes any summer courses or OSAP taken out to pay for those summer courses.  Now for graduating OSAP gives you a flat amount back for every full year of OSAP you were given. This number works about to be 1/3 of the total cost of that your so \$10,000 X 0.33 =3300. If you took 4 years you would ‘get back’ \$13200. This amount is ‘credited’ to your total cost of your student loan \$40,000-13,200 = \$26, 8000.00. This is how the max amount  of student debt a student graduating from university should expect to have. So if you have less than this ‘you’re in great shape’ and if you have more than this well ‘you clearly partied your money away.’

The biggest problem with this assumption is that NOT EVERY ONE QUALIFIES FOR OSAP!! I certainly didn’t. So you only have 3 options than 1) don’t go to university 2) hope and pay your parents (or you) saved enough to cover the cost 3) consider private loans in most cases from a bank. If you take a student line of credit the bank is NOT going to give you 33% of the money you borrowed each year back to you as a ‘congratulations for graduating’ gift. So the full cost of that education is all on your shoulders to pay back. As a result the cost of my education was a whole lot more than \$26, 680.00.

This number (26,680.00) is part of the numerical myth of the befits of a post-secondary degree. Another on created by the Rae Review (don’t get me started on why anything Rae says should be discounted); a government study no less said that having post-secondary education would create \$ 1 million lifetime return in income (ROI). The actual ROI number is a dismal \$20,000. The reality is that a post secondary degree is only good to get your foot in the door as more than 70% of all new jobs in Canada require some kind of a degree or diploma.

And what of that magical max debt number \$6,680.00, Margaret Johnson, President of Solutions Credit Counseling Service Inc. Vancouver says “the average debt I’m seeing is anywhere between \$30,000 and \$60,000.” Maybe I should count myself lucky that I’m only in the upper bracket and not the top bracket.
The government which runs the student loan program wants to make sure it gets its money’s worth, when interest rates were at historic lows OSAP was still charging students as high as 8% interest and if you declare bankruptcy your still expected to pay back your Student Loans, they are not disposable though bankruptcy.

In 2005 when I entered university 57% of my fellow students including myself borrowed money to pay for there education and 2009 when the 2005 class graduated 27% of us had more than \$25,000 indebt compared to 17% in 1995, with the average debt load for new gads at \$26,680.

When you drop a pebble in the lake how long to the ripple effects last? If more than 50% of a generation is starting life already in the red what impact does this have on the overall Canadian economy? Several people have mused in The National Post article that the economy will likely rebound slowly as large chucks of disposable income is spent repaying back student debt. As well many have been pushing retirement savings to a later date.  A few months back RBC did a study that found exactly what these contributors were mussing about. According to the study the top priority for 18-34 year olds was to reduce or eliminate debt (56%) but only 39% said they had RRSP, this is the lowest number in almost a decade. The scariest part is that a full 45% have said they haven't even started the process yet.

If you get a change It would be well worth reading both article.

#### 1 comment:

1. I took out one student loan in 1985 because I was pregnant. It was for \$2500.00. It took me 10 years to pay off that loan. I was prouder of that payoff than I was of my degrees. Now our kids are graduating with \$60,000. It is a crime!