Masters of Debt : A crash course in tuition management

This feature article was first published in ‘Moneysense’ Magazine. You may see versions of it elsewhere, but Debt 101 runs the complete original version. While it’s not advice in the sense of the other articles in this section, it does show how other graduates experience – and deal with -- their student loan debt.Updates of two sidebar articles follow.

Marc Lepage felt proud and excited as he walked across the stage at Dalhousie University in Halifax to pick up his diploma. After six years of demanding study, the 24-year-old graduate had made the dean's list and completed two degrees to qualify as a recreational therapist in psychiatry.

Lepage faced only one problem on his graduation night. Like countless new grads he was anxious, even depressed, about his financial prospects. When he started university, he never dreamed he would end up with $30,000 in student debt. And that $30,000 debt will probably cost him nearly $44,000 if he follows the government's repayment formula for student loans, paying it back over the next decade.

To graduate owing that much money is frightening.

"You wonder if you can make the loan payments, if you'll ever be able to get a car, if you'll ever be above zero at the end of the month," he says. Monthly payments are nearly $400 month for a debt the size of Lepage's. Should interest rates float upward, those payments will rise even higher.

Lepage's only consolation is that he has plenty of company. More than a million people now have student loans in this country. The number of borrowers is rising quickly, and so is the debt they're accumulating. The average debt owed by graduating students nearly tripled from $8,700 in 1990 to $25,000 in 2001. Single parents, or those who earn several degrees, can easily rack up debts surpassing $50,000.

If you went to school in more generous times, those figures may seem impossible to understand. But back in the '80s and earlier decades, students benefited from lower tuition fees, more bountiful government grants and better-paid summer jobs. These days, they're paying more than ever for the right to attend school while facing a tough market for summer and part-time employment.

As a result, student debt is now a problem for more than people in their 20s. Most graduates can now look forward to paying off their student debt well into their 30s. If you're older and considering going back to school to make a career switch, the math gets even more frightening. You might be paying off those student loans well into middle age.

And don't expect much sympathy. People who graduated long ago tend to assume that today's students are to blame, that they must have blown their student loans on stereo equipment and beer.

But that doesn't jibe with financial reality.

Take Lepage, a young man without a wife or children. How did he rack up so much debt? "I wasn't extravagant," he says. "I was a reasonable shopper. In fact, I can't remember the last time I bought new clothes. And I sold my car when I moved out on my own."

Like most students, Lepage had part-time and summer jobs. "I worked at Pizza Hut, I worked at Kmart, and I worked at two record store chains. I also played in a country band for a year and a half on the side." His parents, too, contributed as much as they could.(If they hadn't, Lepage's situation might be much worse. A typical debt for a student with two degrees is $40,000 to $50,000.)

Lepage's real problem was just the disparity between what he could earn and what it cost him to attend school. He was earning $2,000 to $4,000 a year at his minimum-wage jobs. That wasn't enough even to cover the full cost of his tuition, let alone his books or his living expenses. He held off on buying anything not essential. But he still found it difficult to make ends meet.

Government grants once helped to fill the gap, but they are quickly disappearing. After 14 straight years of federal education cuts, all the provinces and territories except British Columbia, Quebec, Saskatchewan and the Northwest Territories have wound down student grants and loan remissions. While student aid has steadily sunk, school costs have soared. Across Canada, tuition rose an average of 16% each year from 1987 to 1997, and it's still climbing.

The total cost of completing a degree is now equivalent to a generous down-payment on a house. In 1997, Simon Fraser University estimated that students paid a minimum of $44,112 to complete a bachelor's degree at the B.C. school, including books and living costs. And British Columbia has Canada's second-lowest tuition rates. In Ontario, Alberta and Nova Scotia, costs are even higher. Consider the MBA program at the University of Western Ontario. One year's tuition rocketed from $1,646 in 1990 to $16,000 in 2002.

While Lepage didn't pay quite that much, he still felt sandbagged by the rising cost of his education. By graduation his tuition had nearly doubled from when he started, to $4,800 a year.

"As my debt grew," he recalls, "I began to feel the weight of the loans more and more. It's like going on a hike where you have to pack your backpack with rocks along the way."

Lepage felt trapped. He could have dropped out of school and worked to save money. But his wages at his part-time jobs hovered around $5.50 an hour, making it hard to put away much cash. "I've seen so many people who leave school to 'save money' who never come back," he says.

That isn't surprising, since loan payments become due after students stop school or switch to part-time studies. Unless those students earn high salaries – which is rare – their savings go to loan payments, not next year's education. With tuition rising at a breakneck pace, it might actually be more cost-effective for today's students to race to the finish line.

Lepage felt that dropping out of school would be a bad decision for many reasons. "My rec therapy program was very tight-knit," he says. "You start with 35 strangers and spend three years becoming more like family than classmates. You take certain courses during certain terms, and some courses are only offered every second year. So if you leave at any point, you risk screwing yourself academically, missing the timing on your internship and losing your support network."

Students like Lepage have been hit from several directions. The carrying costs of their debt rose, starting in 1995, when Canada's governments stopped guaranteeing student loans. A difficult job market has also taken its toll. The average bachelor's degree in Canada now takes 5.2 full-time years. Students feel obliged to work part-time – or to pile on extra credits, pursuing honors degrees or strategic courses to open more doors. Most try to be eligible for grad school, where acceptance rates can be as low as 1% to 2%. And of course, grad school will add to their debt.

Lepage says both he and his girlfriend expect to eventually return for master's degrees. "You need to be flexible if you're going to survive. It used to be you could walk out of university relatively debt free with an undergrad degree. You'd get a job immediately, keep it for 50 years and get the gold watch. Not now."

Still, he's happy with the field he picked – and Canada needs him. We have only a handful of recreational therapists, compared with 16,000 in the United States. But though we're training people like Lepage, we're not employing them. After spending four months doing an internship in North Carolina, he has accepted a clinical fellowship at the University of North Carolina Hospital in Chapel Hill.

"You'd be surprised how many Canadians I met who were working in the United States because it gave them a better chance to pay off their student loans," he says. Mostly young health and education professionals, they graduated just in time to see their chosen fields hammered by cutbacks to government funding. Unable to find Canadian jobs in their specialties, they moved to the United States, where the exchange rate cuts their student loan payments down to size.

Their decision to foresake Canada lends an interesting twist to the debate over the brain drain to the United States. Lepage himself perfectly fits the profile, cited in a recent StatsCan report, of those who flee to the United States: he has more than one degree, he has high grades and he works in health sciences – the field losing the most grads. Some of his classmates have also crossed the border, one to the same hospital that is now employing Lepage.

"I don't want to work in the United States," he says. "I expected to help people in my own backyard, not in another country. But with this debt and the lack of opportunity in Canada …"

We may blithely tell Lepage's generation to "think of education as a lifelong process," but it's also an expensive process. At least, it is in Canada. Most industrialized countries now have free tuition, grants or both. Even the United States, which goes the student loan route, has more generous grants, a lower average student debt and a non-profit interest rate of 6.7%. And as Lepage well knows, it also has jobs so you can make those monthly payments.

In Canada, student debt has reached such mammoth proportions that it may begin to exert a drag on the overall economy. If you combine the figures for federal and provincial student loans with an estimate for privately held student loans, the overall figure creeps close to $20 billion.

Despite this mountain of debt, credit card companies have sign-up kits all over campus. Young students often splurge on luxuries without understanding the effect of an 18% interest rate. The pressure to spend, says Lepage, is intense. "Now that I'm graduating, I'm being inundated with mail from car manufacturers and credit card companies. Yeah, right, like what I need right now is more debt."

In fact, marketers may find students to be poor pickings. Yes, they're entering the workforce, but the bank has first dibs on their income. "Most people with student loan debt are prohibited for at least five or 10 years after graduation from your big-ticket items like homes or cars," says Michael Conlon, chairman of the Canadian Federation of Students.

Conlon believes student debt is having a big impact on how people plan their lives. "I'm 30 years old, and for me, my friends and co-workers, debt is the main priority – you can't think of having children with student loans over your head."

He also sees another trend – "inter-generational debt." That occurs when mom or dad are still paying off their student loans when their own children start university. During the '90s, the percentage of middle-aged students steadily rose in Canada. Says Conlon: "These parents end up limited in the help they can give their children, so you get a vicious cycle of debt."

If none of this fits the image of carefree students backpacking across Europe, well, times have changed. You don't walk away from student loans anymore. To collect on loans, the federal government will garnishee wages, issue property liens, keep tax refunds and use credit collectors. New student loan applicants age 22 and over must pass credit checks. You can't declare bankruptcy on student loans for 10 years after your last loan. And during those 10 years, should you fall one penny behind, you're disqualified from aid.

In this tough new climate, students like Lepage feel it's a kick in the teeth to have older, more subsidized generations blame them for their debt.

"What were my alternatives," he asks heatedly. "Spend the rest of my life barely getting by in retail, hoping to move up to seven bucks an hour instead of five? No thanks. I want to make something of myself."

Author's note:

Since this article was written in 1999, some of the facts, figures and trends cited above have changed.

To further update Master's of Debt, click to these great sources in the Debt 101 Library: Missing Pieces and University Tuition Fee Reports (Statistics Canada). Missing Pieces should work well but we're beginners with Drupal and you may find broken links on the University Tuition Fee Reports page. If you do, just go to the Research Library and access the live links there for University Tuition Fee Reports (in the 'Topics' section.)

The overall situation described in the above article has only become worse. Since Lepage graduated, Canadian students have been hit with sharp increases in both tuition costs and student debtloads.

Two sidebar articles ran with this original story. They're listed below in updated versions.

Your student loan: How to pay faster – and cheaper

Government Help: What’s Out There