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«Policy Matters Ross Finnie, Alex Usher and Hans Vossensteyn Meeting the Need: A New Architecture for Canada’s Student Financial Aid System August ...»

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The government, however, surrounded the CMSF mandate with strong suggestions that the way to do this was to reduce the amount of debt that students were accumulating — as opposed to, say, issuing grants or additional loans on top of existing levels of assistance, thus making more money available to students to meet their direct schooling and related living costs. The foundation has, therefore, largely substituted grants for loans, thus reducing student debt levels, while having questionable effects on access. Furthermore, to a large degree the CMSF funds have simply displaced provincial spending on existing grant and loan remission programs.3 The foundation’s program is not unique in this respect; Canada Study Grants for Students with Dependents have also displaced large amounts of provincial funds. The problem is not so much with the foundation itself as with the inevitable complications of two levels of government competing to give money to the same student on the basis of the same criteria. It is this kind of duplication and overlap that a new architecture could help to eliminate.

Overall, the Canadian student loan system reaches about 450,000 university and college students each year, and about 40 percent of all postsecondary graduates borrow from government programs at some point during their schooling (Finnie 2001a, 6). Students receive approximately $3 billion each year in loans and $1 billion to $2 billion in grants, depending on what exactly is counted, and how. The cost to governments of providing this assistance is somewhat uncertain because there is no standard methodology for mea

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suring expenditures, but it is likely in the range of $2.3 billion to $2.4 billion.

Slightly under half of the total grant money comes in the form of back-end remissions.

Tax Credit and Savings Programs Canada has used tax expenditures to subsidize students for over 40 years.

Tax expenditures can be viewed as direct spending programs delivered through the tax system, and those related to post-secondary education are in this sense little different than traditional direct student-aid programs.

Tuition fees and a monthly “education amount” were originally tax deductions.

But since these deductions provided more benefit to those with higher incomes (who have higher marginal tax rates), they were — like numerous other tax deductions — turned into the somewhat less regressive tax credits in the 1987 Tax Reform. At present, all tuition and compulsory fees (save student association fees) are eligible for the tuition tax credit, while the value of the monthly education-amount tax credit was raised from $200 to $400 ($200 for part-time students) in 2000. Students may use these credits in one of three ways. They may employ them to reduce their own current tax liability; they may transfer them to a parent, guardian, spouse or grandparent to reduce their current tax liability; or they may carry forward the value of any unused credits to reduce their tax liability in subsequent years. As with all other tax credits, the value of the credit is multiplied by the lowest tax rate (currently 16 percent) and the resultant amount is credited against tax owing.

In addition to these credits, there are a number of smaller tax expenditures. These include the deduction for moving to study (students who move to study may deduct expenses related to the move); the deduction for scholarship income (the first $3,000 of income from scholarships in any year is tax-free; in Quebec, all scholarship income is tax-free); and the student loan interest tax credit (a tax credit is given equal to the value of interest paid on a student loan during a calendar year; this may be used immediately to reduce tax payable or carried forward for up to five years).

These tax expenditures originate in the federal income tax code. But because provincial taxes are linked directly to federal taxes, tax expenditures at the federal level also result in provincial tax expenditures. Quebec, having its own tax system, also has its own set of tax expenditures, and certain other provinces have their own education-related tax provisions in addition to those that derive from the federal system. For example, Ontario has tax credits related to the hiring of co-op students, while Saskatchewan has a special one-time nonrefundable tax credit of $350 to encourage recent graduates to stay in the province after graduation.

14 Enjeux publics Août 2004 Vol. 5, no 7 Meeting the Need: A New Architecture for Canada’s Student Financial Aid System In addition to these forms of tax-based assistance, which are intended to offset education-related expenses directly, other tax-based measures have been put in place to encourage savings. Since 1972, the Canadian tax code has given special status to Registered Education Savings Plans (RESPs). RESPs are savings accounts that permit tax-deferred growth (growth in the fund is left untaxed until income is withdrawn, at which time it becomes taxable in the hands of the beneficiary). Up to $4,000 per year may be contributed to an RESP. These vehicles are mostly used by upper-income families, who have the means to save and would probably do so anyway, or would find another way of financing their children’s education, rather than by lower-income families who are in greater need of assistance (Milligan 2002).

In 1998, the Government of Canada created the Canada Education Savings Grant (CESG) in an attempt to encourage more Canadian families to save for their children’s education. Under this plan, the government topped up every dollar contributed to an RESP by donating 20 cents, to a maximum of $400 per year. Data from the most recent Survey of Approaches to Educational Planning indicate that educational savings are expanding quickly (Shipley, Ouellette and Cartwright 2003), although other sources point out that the majority of this program’s money has gone to upper-income families (Milligan 2002; Usher 2004b). Partly in response to this, the 2004 federal budget increased the top-up rate on the first $500 contributed to 40 percent for low-income families and introduced a new Canada Learning Bond (CLB), which will provide every child born into a low-income family (defined, as per National Child Benefit [NCB] guidelines, as a family with an income under $35,000) with a $500 bond, cashable for post-secondary education once the child turns 18. Subsequently, these children will qualify for $100 CLB instalments until age 15 in each year their families are entitled to the NCB supplement. Children born after 2003 who are not eligible for the CLB at birth but become entitled to the NCB supplement in a subsequent year will qualify at that time for a $500 CLB and thereafter be eligible for the annual $100 CLB instalments.

In total, education-related tax expenditures in Canada currently amount to approximately $1.7 billion per year, of which approximately two-thirds comes from Ottawa. In addition, annual CESG expenditures (which come exclusively from the federal government) now total close to $400 million; this is expected to rise by another $100 million once the 2004 budget provisions are enacted.

Major Flaws of the Current System The Canadian student financial aid system thus provides a substantial amount of support to students and their families in myriad ways. And, especially in the case of loans and grants, much of this money is targeted at those who need

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it. However, due to the different eligibility criteria, some of this assistance also ends up with students who are not so needy; the other forms of aid — tax credits and some other grants, in particular — are even worse in this respect.

Thus, while this student financial aid system has some very sound elements, increases many Canadians’ access to post-secondary education, and improves the terms under which they are able to study and how they finance that schooling, it also has some major flaws. These include the following.

Tax credits represent a relatively large share of student aid, but they are poorly targeted Canadian governments collectively spend almost 40 percent of all their student financial aid dollars in the form of education-related tax credits, but these tax credits are distributed almost entirely without reference to need. Much of the money goes to students from higher-income families — or their parents (or even grandparents) — who do not really need the assistance to ensure their access to post-secondary studies. Meanwhile lower-income families are unable to benefit because they do not have the tax obligations required to take advantage of the benefits or, at best, receive no more assistance than higher-income families.4 Families with incomes above the national median receive roughly 60 percent of all education and tuition tax credits, while in the CESG program, the figure is closer to 70 percent (Usher 2004c ).

In addition, it is likely that many individuals are not fully aware of these credits or their value, and do not receive the benefits until after they (the students or those to whom they pass their credits) receive their tax refunds — typically, after the school year to which the benefits are meant to apply. Spending on tax credits would thus be better directed toward programs that are specifically designed to help students from low-income families who really need the assistance.

The independent class is too large Other forms of Canadian student assistance — grants, loans, loan remissions, and so on — are designed to be need-based. In theory, this means that more assistance will flow to students from lower-income backgrounds. In practice, however, because the assistance provided to independent students is actually greater in total dollar terms than the amount that goes to individuals who depend on their parents, and because students are too often considered independent of their parents at the age of 22, much of Canada’s need-based assistance goes to students from wealthier families.

Across the country, students are considered independent if they are (or have been) married, have a child (in Quebec, 20 weeks or more into a pregnancy), have 16 Enjeux publics Août 2004 Vol. 5, no 7 Meeting the Need: A New Architecture for Canada’s Student Financial Aid System been available to the labour force on a full-time basis for two years, or have been out of secondary school for more than four years (in Ontario, five years; in Quebec, 90 credits or more completed at the undergraduate level). The last criterion is especially problematic because it makes individuals who have taken their time getting into or through post-secondary programs (including those who choose to travel or take a bit of time off from school) independent toward the end of their studies. As a result, roughly 60 percent of the CSL population is independent, even though best estimates suggest that independent students form only 30 percent of the Canadian post-secondary population (Usher 2004a).

There is no question that treating students as independent and making them eligible for financial assistance without regard to their family’s income is appropriate in some cases. But the current rules and practices are not restrictive enough;

they need to be reformed so that at least some of the money now spent on students from higher-income families who manage to qualify as independents is retargeted at young people from lower-income families who are in greater need of the help.

Doing so would almost certainly have a positive impact on access.

Assistance limits are inadequate As discussed earlier, in most of the country single students are currently eligible for a maximum of $275 per week in direct assistance, a figure that has not changed since 1994. Spread over a university-standard 34-week period of study, this translates into $9,350 per year. Just on a priori grounds, if those limits were appropriate in 1994 — which was probably the case, as they were based on the best evidence available at that time — they cannot be so today, now that costs, especially tuition, have risen significantly.

Furthermore, although calculations vary, empirical studies indicate that even by conservative estimates at least 25 percent of all students have needs in excess of the lending limits established by the aid system itself (Hemingway 2003a,b). Yet regardless of assessed need (which takes into account the expected contributions of students themselves), students cannot receive more than $275 per week. So we have the rather bizarre spectacle of a need-based program telling students that they need a certain amount of money but not giving them what they need. Fred Hemingway makes a compelling case that student assistance maxima are currently inadequate and should be increased to approximately $350 per week, although even this may not be enough (2003a,b).

Finally, students are voting with their feet — or at least their bank accounts and borrowing patterns — and appear to have dramatically increased their dependency on private loans in recent years (Junor and Usher 2002). It is possible that this represents frivolous or unnecessary borrowing to support lifestyle spending, but Policy Matters August 2004 Vol. 5, no. 7 Ross Finnie, Alex Usher and Hans Vossensteyn it seems more likely that students are borrowing simply because they need the money to pay basic schooling expenses when assistance packages are inadequate.

We thus believe that the student financial aid system should increase the maximum amounts available to whatever is required to meet the students’ needs.

After all, if the system determines that students need a certain amount of money in order to acquire a post-secondary education, then the student financial aid system should make this amount available.

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