«Policy Matters Ross Finnie, Alex Usher and Hans Vossensteyn Meeting the Need: A New Architecture for Canada’s Student Financial Aid System August ...»
This may sound simple, or even obvious. And one might reasonably expect, given the plethora of student-aid-related programs in existence, that the current system is doing its job by removing financial barriers to post-secondary education. After all, we have the Canada Student Loans Program and its provincial counterparts, the Canada Millennium Scholarship Foundation, myriad grant programs at both the federal and provincial levels, debt-remission programs, programs that help individuals who are having difficulty repaying their student loans in the post-schooling period, education-related tax credits, Canadian Education Savings Grants, Registered Education Savings Plans, all kinds of institutionallevel support and more — all of which costs almost $5 billion each year.1 Unfortunately, these programs are not doing the job — or at least not the full job — of guaranteeing access in the manner intended. They don’t get enough money to some who need it, and they provide support to some who don’t (Hemingway 2003b; Usher 2004a). We should be doing better.
What is needed is a “new architecture” for student financial assistance in this country. We propose replacing the current hotchpotch of programs with a single program that effectively and efficiently delivers support to those who need it without squandering scarce dollars on those who don’t. The good news is that this system could be developed without inventing a whole new set of structures and procedures from the ground up — a disruption that would carry its own set of special challenges and costs. The even better news is that we could implement such a system without spending any new public money. This is one policy area 8 Enjeux publics Août 2004 Vol. 5, no 7 Meeting the Need: A New Architecture for Canada’s Student Financial Aid System where the solution depends not so much on finding new and more financing as on doing better with the existing resources.
Not only is reform of the student financial aid system possible, but it is also important, since providing every Canadian with the chance to pursue postsecondary studies is both a basic issue of fairness or social justice and an essential step to ensuring that we have the skilled labour force needed in the emerging knowledge-based economy in the years and decades to come.2 The student financial aid issue is a case where doing the right thing also makes good economic sense — a potent context for policy discussions.
In this paper, we begin by describing the existing student financial aid system and its main shortcomings. We then place the issue in an international perspective by reviewing the various approaches to providing student assistance in existence around the world and situating the Canadian system in that context.
This leads us to a description of the “new architecture” that we propose, including not only the key elements of the plan, but also a consideration of some of the associated design and implementation challenges. The concluding section summarizes the major points of the paper and identifies the policy debates that might be expected should Canada begin to move toward such a system.
The Existing Canadian System The Canadian system of student assistance, which is an area of joint policy responsibility between the federal and provincial governments, is dauntingly complex. There are loan programs at the federal and provincial levels, provincial need-based grant and debt-remission programs, other grants for particular demographic groups and those in certain disciplines (for example, Aboriginals and female graduate students in the sciences), still more grants and tax credits for families who save for their children’s educations, other tax credits to help defray direct expenses (tuition fees and the standard education credit) and the interest paid on student loans, various forms of institution-based aid, privately funded bursaries, and more. The major components of this system will now be described in turn.
Student Loans and Need-Based Grants We pay the greatest attention to the major loan and grant programs, since our new architecture essentially builds upon these while eliminating most other major sources of aid. These alone, however, comprise a complex system. As one recent publication noted, Policy Matters August 2004 Vol. 5, no. 7 Ross Finnie, Alex Usher and Hans Vossensteyn it has two national loan programs (one for full-time students and one for parttime students). It has three quite separate methods of providing assistance to students (need-based, income-based, and universal grants). It has five national grant programs, seven provincial/territorial (P/T) loan remission programs, eight P/T grant programs, 12 P/T loan programs, 13 P/T student assistance programs, 15 major providers of public student assistance, over 40 different student assistance limits (depending on a student’s province, marital status, dependents, and level of study), more than 100 different loan/grant combinations within these aid limits, and hundreds of thousands of possible aid configurations once assessed need is taken into account. (Junor and Usher 2002, 115) But despite the complexity and variation that exist across the country, most student loan and associated need-based grant systems follow a single paradigm.
As we will see in the international section, the Canadian system is an example of the student-centred model, as are the systems of Australia, New Zealand, the United Kingdom, Japan and the United States.
In Canada, close to 99 percent of all need-based loan and grant assistance goes to full-time students (defined as carrying at least 60 percent of a full course load). A similar percentage of aid is given on the basis of assessed need as opposed to personal or family income. While it may seem odd to distinguish between need and income in this fashion, the distinction is crucial, as the former term includes an examination of costs as well as resources.
The manner in which costs and resources are assessed differs slightly from
province to province. In general, accepted costs include the following items:
• Tuition and mandatory fees
• Books, equipment (up to $3,000)
• Housing costs (based on province of residence and at-home/away-fromhome status)
• Travel costs (if living away from home)
• Other living expenses
The resources considered to be available to the student are the following:
• An assumed parental contribution, calculated as a percentage of family income (if the individual is considered dependent) or a percentage of spousal income (if the individual is married)
• Minimum contributions from the student’s summer earnings, plus 80 percent of in-school earnings over $1,500
• Adjustments for scholarships received, liquid student assets, savings (partial exemption for RRSP savings) and equity held in a motor vehicle ($5,000 exemption) 10 Enjeux publics Août 2004 Vol. 5, no 7 Meeting the Need: A New Architecture for Canada’s Student Financial Aid System The principal contributions on the part of parents and students are deemed, or estimated, and they therefore do not necessarily represent actual amounts. The true parental contribution may, for example, range from zero to much more than the indicated amounts, while students may earn and save more or less than what the standard formulas assume. While such an approach means that the different circumstances faced by individual students are not taken into account, it is a relatively efficient and nonintrusive means of calculating students’ needs and is similar to those used in other countries.
The first dollars of need — costs minus resources — are always met by loans. Only if the loan attains a certain level does a student become eligible for grants. The exact level at which loans turn into grants differs by province (see appendix A for these and other details regarding the country’s need-based grant and loan programs), but in much of the country it is in excess of $7,000 per year.
In a number of provinces (British Columbia, Quebec, Alberta and Ontario), some or all grants are provided up front — that is, at the same time that loan assistance is distributed, in September and January. In other cases (Alberta, Saskatchewan, Manitoba, Ontario and the four Atlantic provinces), grants are provided as loan remission after a student has successfully completed a year of studies (see appendix A for details). Loan assistance is always portable across provincial boundaries. In most but not all cases, grant assistance is portable as well.
Although the student assistance system calculates need for all students, it does not necessarily meet that need. In most provinces, the maximum assistance available for a single student with no dependents is $275 per week, or $9,350 for a standard 34-week school year. For students with children, the amount ranges from $315 per week ($10,710 per year) to $500 per week ($17,000 per year).
Quebec has much higher assistance limits but also a stricter need-assessment system, which makes it more difficult for its students to attain greater amounts of support. Remarkably, these maxima, with small exceptions, have remained unchanged since 1994, although in its March 2004 budget, the federal government outlined a plan to increase these limits and allow students to borrow greater amounts.
While a student remains enrolled on a full-time basis, governments pay the interest on the student loan. At the end of studies, interest begins to accumulate on the loan, but students are not required to make payments during an initial sixmonth grace period (although interest accumulates). After the six months are up, students must begin paying back their loans at a steady rate.
Since the beginning of the 1990s, there have been four different regimes under which student loans are issued and repaid. Before 1995, private financial institutions issued loans, although government loan programs determined eligibility, and institutions could not refuse to issue a loan that had been approved.
Policy Matters August 2004 Vol. 5, no. 7 Ross Finnie, Alex Usher and Hans Vossensteyn Governments — both federal and provincial — guaranteed these loans by committing themselves to buying defaulted loans at full value (including outstanding interest) from the lending institutions. From 1995 to 2000, instead of acting as guarantor, the government paid lenders a 5 percent risk premium on all loans going into repayment in a given year. In return, the banks assumed virtually full responsibility for collection. When the 1995-2000 agreement ended, an interim arrangement was put into place whereby the government became the lender (although it continued to issue loans through private institutions) and assumed full responsibility for all new loans issued. Since 2001, the government has issued student loans directly and assigned their management and collection to private companies brought into existence for this purpose.
For the most part, student loans are meant to be repaid within a 10-year period, although a substantial proportion of students manage to repay their loans within a shorter period (Finnie 2001b). During the repayment period, borrowers in repayment are eligible for “interest relief” (IR) if they have high debt-toincome ratios. More recently, the very few students whose debt-to-income ratios are persistently high over a period of three years or more have become eligible for “debt reduction in repayment” (DRR), which reduces the principal owed, but this program has had miniscule participation rates to date.
Nine provinces and one territory participate in the Canada Student Loans Program. In these places, need is met — in theory, at least — on a 60/40 basis;
that is, the Government of Canada provides assistance equal to 60 percent of need up to a maximum of $165 per week, while the provinces pay the remaining 40 percent. Given that many provinces also provide assistance over $275 per week to students with dependents, and that provinces are typically larger per capita providers of grant assistance, the actual distribution of overall student assistance costs is actually closer to 40/60.
Quebec, the Northwest Territories and Nunavut have chosen to opt out of the Canada Student Loans Program. They have their own loan systems, to which the Government of Canada contributes through a system of alternative payments, which are built into the national student loans legislation (the Canada Student Loans Program was, in fact, the first federal program that provinces were permitted to opt out of with compensation). Quebec’s program is run on the same basic principles as those of the rest of the country, with three main differences.
The first is the levels of expected parental contribution, which are much higher than those in other provinces. The second is that the system involves far more grants than loans. Until 2004, undergraduates received only the first $2,400 per year of assistance as a loan, with the rest of the assistance package coming as a grant (the 2004 provincial budget raised the loan ceiling to $4,000 per year).
12 Enjeux publics Août 2004 Vol. 5, no 7 Meeting the Need: A New Architecture for Canada’s Student Financial Aid System Finally, the limits on assistance are much higher than elsewhere: nearly $500 per week for single, independent undergraduate students, and close to $650 per week for those with dependents.
Roughly integrated with this system of loans and grants is the Canada Millennium Scholarship Foundation (CMSF). This large nongovernmental organization — created by an act of Parliament in 1998 and endowed with $2.5 billion to be spent primarily on need-based grants over a 10-year period starting in 2000 — is the country‘s largest single provider of nonrepayable assistance. The foundation divides its roughly $285 million in annual bursary expenditures into equal per capita shares for students in all 10 provinces and 3 territories. Yet the foundation does not run a national program in any real sense.
Instead, it effectively operates 13 parallel programs in conjunction with each province (as per its mandate). In Ontario, Quebec, Alberta, British Columbia and the three territories, foundation money arrives in the form of a grant in the second term of a student’s academic year. In the rest of the country, the money is used as a form of remission to reduce outstanding student debts.
The explicit legislative mandate of the CMSF was to provide scholarships to Canadian students in order to improve their access to post-secondary education.