Should We Forgive Student Debt?

Erika Shaker, the national office director of the Canadian Centre for Policy Alternatives, says yes.

The cost of tuition shouldn’t be an entrance fee to a decent life. Most jobs that pay a good salary require at least an undergraduate degree. But average annual undergraduate tuition in Canada is now $6,700, more than 20 per cent higher than a decade ago—and this doesn’t include compulsory fees, which are largely unregulated. About half of Canadian students owe money on government or non-government loans upon graduation. In 2018, graduates with a bachelor’s degree left school with $20,004 in median student debt. Professional-degree earners carried student debt of $60,287. This has long-term ramifications. Extrapolating from Ontario’s 2018 numbers, an estimated 22,000 graduates across Canada annually file for insolvency, in large part because of student debt.

With governments providing less and less operational funding, post-secondary institutions are relying more on tuition fees. Federal and provincial governments have shifted focus to targeted income-based grants and more student loans. While grants are helpful, loans merely postpone the problem. A better solution would be the elimination of tuition and cancellation of student debt.

Why? Ironically, a post-secondary education—long the ticket to socio-economic mobility—can now exacerbate wealth inequality. Graduating with a mountain of debt creates drag both on the economy and on graduates. Major life experiences are delayed, such as marriage, starting a family, purchasing a home or travelling. New graduates unable to land good jobs in their field often end up in unrelated low-wage work, serving tables or packing boxes to make ends meet and pay down their debt. It becomes hard to exit this cycle, and the longer it continues, the more difficult it can be for graduates to pursue long-term career goals and realize their full potential.

As students who incur debts are often women and people of colour, the existing post-secondary funding model runs counter to a just recovery from the economic impacts of COVID-19. At the same time, Canadians aged 15–24 were the first to lose their jobs during the pandemic, and only began to recover to pre-COVID employment levels last fall.

The cost to eliminate student debt isn’t the boogeyman critics make it out to be. Ending tuition and forgiving existing debt would cost $16-billion in year one, then roughly $10-billion annually, according to the Parliamentary Budget Officer in 2019. A small wealth tax (1–3 per cent) on the top 1 per cent of Canadians could net $28-billion in year one and $363-billion over a decade, according to CCPA’s Alex Hemingway—enough to pay for free tuition and more.

A one-off debt cancellation wouldn’t address the core issue of high education costs. But ending debt and tuition fees would make the long-term benefits of post-secondary accessible to all, allowing students to focus on gaining careers and living fulfilling lives. Let’s give the next generation room to grow.

 

Giovanni Gallipoli, the professor of economics at the University of British Columbia, says no.

The debate of the financing of higher education has a long history. Supporters of debt forgiveness, or free post-secondary education, argue that the current system is unfair. Capable individuals from underprivileged backgrounds are especially disadvantaged. By forgiving student debt and making post-secondary education free, they argue, a basic inequity would be repaired. However appealing these arguments may sound, careful inspection suggests they are flawed.

Who would be subsidized? Post-secondary attendance persists across generations (i.e., children of graduates are much more likely to attend). Such persistence is hard to explain through fiscal advantage alone; instead, a growing body of evidence suggests early investments in child development play a pivotal role in later choices to attend post-secondary. It would be misguided to forgive loans or make post-secondary free: these expenses would be financed through general taxation. In practice, taxes paid by families whose kids aren’t likely to attend post-secondary would be used to subsidize the education of students who would attend whether it were free or not.

Subsidizing post-secondary can’t undo past underinvestment in human capital and basic skills. Late remediation to address inequities is a poor substitute for early interventions in children’s formative years. More resources should be directed to early-life interventions that build foundational skills and make post-secondary education productive.

Since post-secondary preparedness goes hand in hand with early investments in human capital, and since post-secondary preparedness positively correlates with getting degrees and occupations that pay more, reducing the cost of post-secondary would mostly benefit students from wealthier families. Inequality would not decrease; it would possibly increase.

Many students who take out loans pursue degrees in medicine, law, business or engineering. These professions pay incomes that are many multiples of the initial tuition investment. Why should these investments be fully financed by society at large? Of course, the real problem is with high debt taken out to pursue degrees and occupations with low incomes. The debate we should be having is whether such low-return choices should be encouraged and, if so, how. If society thinks that some of these endeavours are valuable regardless of their fiscal returns, then their financing should be tailored carefully rather than bluntly erasing all types of costs and fees.

Is the objective of debt forgiveness to redistribute resources? If so, we should be careful. Universally erasing all debts would constitute a transfer to many people who accrue high incomes after graduation irrespective of their family background. There are more efficient ways to help disadvantaged citizens.

Higher education should be subsidized because there are obvious gains for society at large. But blanket policies to forgive all debt or make post-secondary education free are misguided.

 

Erika Shaker responds to Giovanni Gallipoli

ALONG WITH THE ELIMINATION OF TUITION fees, universal student debt cancellation is a key part of a comprehensive plan to address growing inequality by helping ensure that everyone who wants to go to college or university can, no matter their family income. And while post-secondary education is virtually a prerequisite in today’s job market and improves earning potential, it’s also linked to higher levels of civic engagement and community involvement.

Giovanni Gallipoli argues that the taxes of people whose kids don’t pursue post-secondary education would increase to cover wealthier students’ debt and the debt of those graduating into higher-paying professions. If we want to reduce inequality, he says, public resources should flow to early-childhood policy interventions rather than early-adult ones. Let’s avoid false choices. “But the wealthy would benefit too—maybe even more” should not be an excuse to settle for tweaks to an inequitable status quo. It should be the impetus for a comprehensive strategy to address systemic inequality.

People pay taxes to support a healthcare system they may not use as often as others do. Cyclists’ taxes fund highway repairs. People without children pay taxes that support public schools. This is part of the bargain of taxes—collectively we provide the services that benefit everyone. Rather than play the false choice game, let’s determine what constitutes a healthy, sustainable, multifaceted society, and then figure out the fairest and most equitable way to pay for it. (Hint: progressive taxation.)

Student debt cancellation is a key part of a comprehensive plan to address growing inequality.

Gallipoli fairly points out that early investments in child development are critical, perhaps (he suggests) moreso than improving access to post-secondary. Indeed these investments are critical to children’s development and women’s economic advancement, as part of a strategy to tackle inequality. It’s why CCPA and others have presented evidence-based research that makes a social and economic case for affordable universal childcare. But the choice doesn’t have to be early childhood education or fully funded post-secondary. The CCPA’s wealth tax proposal allows for both—and then some.

Gallipoli writes that because “the real problem is with high debt taken out to pursue degrees and occupations with low incomes,” we should think about whether those choices should be encouraged. He suggests we could allocate assistance to “low return” choices if we decide their societal benefit outweighs their “fiscal returns.” This seems like a patchwork, after-the-fact approach to containing inequity, rather than a comprehensive and up-front commitment to reducing it. But there are other problems with this market-based strategy.

First, it confuses “price” with “value,” equating the “return” of a profession with its income. This disadvantages many fields in which women are disproportionately represented, such as childcare or social work—jobs with tremendous value to society and the economy but which are notoriously undercompensated.

Second, how do we determine what professions are valuable to society—and who decides? With unpredictable market shocks, what seems like a “valuable” area of study can change over the course of an education. This downloads a tremendous amount of risk onto individual students. It also perpetuates the myth that debt is a result of “bad choices.” For young people, taking on student debt might be their only ticket into the job market.

Finally, Gallipoli argues that because professions such as law and medicine “pay incomes that are many multiples of the initial tuition investment,” cancelling student debt would constitute “a transfer to… people who accrue high incomes after graduation irrespective of their family background.” But when Ontario’s professional program fees were deregulated in the late 1990s, the enrolment gap between students from high and low socio-economic backgrounds grew substantially, compared to provinces where fees stayed constant. Indeed, high tuition fees and private debt financing ensure that wealthier students (or those “less vulnerable” to debt) continue to be disproportionately represented in the professions.

Graduates generally have a job-market advantage, but not everyone finds employment when debt repayment begins, regardless of academic credentials. Graduates unable to land good jobs in their field often end up stuck in unrelated low-wage work, many juggling precarious jobs to pay down debt. Debt also discourages innovation.

Post-secondary education is a public investment with a high rate of return. It’s true that Canadians who attend post-secondary are generally, though not always, wealthier. But if the goal is to make society more equitable, including when it comes to access to post-secondary, then let’s stop assuming inequity is a norm that should be tolerated. Let’s think of it as an obstacle to be eliminated.

 

Giovanni Gallipoli responds to Erika Shaker 

SINCE 2011 THE AVERAGE COST OF TUITION in Canada has increased from $5,300 to $6,700 annually.  Over the same period, the consumer price index has grown by about 20 per cent (what we call inflation).  This implies that real tuition costs, accounting for inflation, have grown slightly more than 5 per cent in 10 years.

This simple arithmetic suggests that the cost of purchasing the “asset” produced through university education (human capital, which generates earnings over one’s working life) has risen less than the cost of other common assets such as housing or stocks.

Next, let’s consider earnings growth: annual earnings,  over the past 10 years, have grown by almost 30 per cent nominally, and by roughly 10 per cent in real terms. If we view earnings as dividends from the “education asset,” the returns, on average, have grown faster than the costs.

But this calculation, focused on averages, doesn’t paint the full picture. Most of the past decade’s inflation-adjusted tuition increase was in fields such as engineering (12 per cent), medicine (9 per cent) and dentistry (41 per cent), which are associated with consistently higher graduate earnings. It’s not surprising these students carry higher debts. By comparison, in real terms, tuition costs in the humanities didn’t increase at all.

The lesson from this is that education costs, in Canada, are not growing overall relative to earnings. Also, there is a lot of heterogeneity across fields. For example, costs and returns in engineering and medicine are quite different than in other subjects. One should exercise caution before making sweeping statements about “debt cancellation” and “free tuition” on grounds of equity and fairness.

Benefits would largely accrue to the richest households, whose kids are more likely to attend post-secondary.

Perhaps a more constructive way to approach these issues is to start from a basic question: What makes education loans different to justify government subsidies? The answer is well known: Unlike a mortgage, which entails a transferable collateral (property can be seized if contractual terms are violated), human capital is inherently non-transferable. It’s not possible to transfer ownership of the stock of skills accrued through education (and valued by society).

Since skills can’t be used as collateral for commercial loans, banks are reluctant to lend money to students (what we call “market incompleteness”). This justifies government subsidies to higher education in the form of low-interest student loans.

Indeed, different levels of government subsidize post-secondary to the tune of billions of dollars per year. Outlays take different forms, including outright transfers to institutions, subsidized loans and grants to students, and research grants by the federal research councils. The extensive use of public funds has broad consensus, and rightly so, because it supports investments in human capital driving economic growth and social mobility.

Should governments do even more and forgive all debts or make post-secondary education completely free? Advocates for such policies rarely acknowledge the high returns associated with many degrees or the comparatively low costs of acquiring them in Canada relative to places such as the US and the UK (where tuition costs can be much higher). Regardless, and as one might expect, every year hundreds of thousands of people in Canada choose to take out loans to finance university costs; arguably most of them would do so even at higher prices because they realize that the benefits outweigh the costs.

Lastly, and contrary to a frequent suggestion, free higher education would be expensive if we aim to maintain a minimum standard of quality. Canadian institutions are already struggling to meet such standards under the status quo. The claim that free post-secondary could be paid through wealth taxation is, at best, tentative. Taxing the stock of wealth would be in addition to taxes on its returns (capital income), which Canada already imposes. Outright wealth taxes—taxes on the stock of wealth rather than on the income generated by wealth—are controversial but already exist in some jurisdictions and have been extensively studied, with very limited evidence that they raise vast sums. The notion that in any given country large revenues could be effectively taxed away from wealthy estates over long time periods remains questionable.

But even if it were feasible, any such tax revenues couldn’t be targeted to a specific use, and general income taxation would cover most of post-secondary’s costs to the public. Completely free post-secondary education would result in a transfer of wealth to individuals who are, by most metrics, unlikely to need it if one considers their future earning paths. Benefits would largely accrue to the richer subset of Canadian households whose children are more likely to attend post-secondary. Be careful what you wish for.

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