The firestorm of controversy that erupted last week over the federal government's plan to pay the banks more than $100-million a year to continue administering the Canada Student Loan Program (CSLP) is the unfortunate outcome of a decision made five years ago.
After slashing funding for post-secondary education and watching student debt nearly triple, the Chrétien government used the banks to extricate itself from the nasty business of collecting loans from students carrying debts as high as $60,000. Since that decision, more than $300-million has been transferred to the banks to run the program.
In addition to securing federal money to insulate themselves against loss, the banks have pushed for policies that would further minimize their financial risk. The banks' interest in moving the program closer to a consumer loan is obvious: Lending money to those who are high-risk is not a profitable venture. It simply makes good business sense to encourage and reward policies that dismantle the social mandate of the program.
Since 1996, credit checks have been introduced as a condition of receiving a student loan and students are prohibited from declaring bankruptcy on student loans for 10 years after leaving school. Despite all this, banks are still clamouring for more public money to insure a profit.
When the program was abandoned to the banks in 1995, the explanation provided was that the CSLP had become too expensive to manage. The "partnership" with the banks was necessary to "save" the program. However, what lies beneath the official explanation is the admission by the federal government that it is no longer interested in fulfilling the program's original mandate of providing low-cost loans to those who cannot afford the up-front cost of post-secondary education. Simply put, turning the program over to the banks strips it of public accountability and adds the cost of providing a profit to the banks.
In exchange for taking on the program, the banks receive a risk-sharing premium of 5 per cent on every loan dollar issued. Under the agreement signed in 1995, the banks receive $75-million a year from the federal government on the basis of the 5-per-cent premium. The risk premium is designed to compensate the banks for losses incurred when a loan goes unpaid. The new agreement will pay the banks in the order of $110-million a year.
Both the banks and the federal government claim that the soaring cost of the system is caused by a poor repayment rate on loans. They point to high default rates to justify the taxpayer subsidy to the banks. What is rarely said, however, is that the default rate merely reflects those loans that are behind in repayment. A borrower is in "default" after three or more missed payments, but default rates tell us next to nothing about the overall performance of the loan.
Although it is true that student loans are more likely to encounter difficulty in the repayment phase, the overall performance of student loans is actually very good. The latest available data suggest that 92 per cent of student loans are paid back in full. The stigma of the word "default" does important political work in justifying the payments to the banks, but it contributes little to the debate about whether or not student loans should provide opportunity or generate profit.
In the early 1990s the federal government made a conscious decision to cut about 20 per cent, or $4-billion, of the funding it transfers to the provinces for post-secondary education. The provinces passed these cuts on to students in the form of higher user fees and every province, with the exception of British Columbia and Quebec, eliminated its grants program.
The numbers speak for themselves: Between 1990 and 1998, the average tuition fees for an arts program increased by 126 per cent from $1,496 to $3,379, the average student debt upon graduation increased from $8,000 in 1990 to $25,000 in 1998, and youth unemployment hovered around 20 per cent during the 1990s. It is hardly surprising that students experienced increased hardship in repaying their loans. What is surprising is the belief that turning the student loan system over to the banks would be a solution to this problem.
The very intention of the CSLP is to encourage the participation of those most in need of the skills offered by post-secondary education. If CSLP does not offer the hope of post-secondary education to those most likely to declared "bad risks," it remains a social program in name only. To offer a sustainable solution to the student debt crisis the federal government must re-commit itself to funding post-secondary education. Canada's social and economic health is dependent on a strong system of post-secondary education.
Paying the banks over $100-million a year to administer a social program is a very curious way to secure the future of anything -- except, of course, the future prosperity of Canada's banks. If a policy decision has been made to allow the CSLP to slowly wither away into a fully privatized, commercial loan portfolio, the moves made over the past five years make good sense. If, however, access to education is still the guiding force of the CSLP then Canada's chartered banks are the least likely guardians of such a social program. Michael Conlon is national chairman of the Canadian Federation of Students.