By Goodwin Ginger
With so many options to finance today’s higher education costs who would not want to go to university? The federal and provincial government say they are dedicated toward helping students invest in human capital. With Student loans, interest relief, scholarships and an Income tax credit on the interest you pay on your loans, whom can’t afford to go to university and help Canada upgrade the nations human capital?
Helen decides to pursue a career in the social sciences and humanities. Helen works summers, gets scholarships and graduates with an honours degree in four years. After completing her undergrad degree she decides to go on to graduate school and pursue a masters. She completes this in 1 year. She then decides to pursue a Ph.D., Which she completes in 6 years.
Her total time in school is 11 years at a cost of tuition, books and living costs of $12,000 per year or $132,000 total cost not including forgone income while in school. How does Helen finance this $132,000 you ask? Well she is a bright young woman so she receives scholarships, bursaries and TA employment. Even so she can only manage to rustle up $96,000 of it herself so she borrows an additional $36,000 from the federal and provincial governments.
Scenario A: the best of all possible worlds
Upon successful completion of her Ph.D., in Liberal Pre-emptive War she receives a tenure track position at the Munk Centre for International Studies at a starting salary of $74,000. Wow you say that is one helluva salary. Not really her brother got one of those trade degrees in law and is earning well over $100,000 a year (5th year call and he works for the Empire). In any case Helen receives a letter informing her that it is time to pay the piper. She decides that she wants to pay her loan off as quickly as possible so as to minimize the amount of interest she will pay. So she decides to amortize her loan over 5 years at the government’s interest rate of 8.25% for a monthly payment of $847.50 per month. This means that in addition to the principle Helen will pay $14,850 in interest. For a total cost of borrowing of 50,850 and total education cost of $146,850.
Scenario B: the most likely in this world
Helen, although she be bright and quick of wit made the fatal mistake of doing a degree in Why the American Empire is a Plague Upon Human Progress. As such she receives a 3 year contractually limited appointment at York University teaching in a field far, far away from her major research interest at a yearly salary of 55,000. Helen receives her consolidation agreement form from the provincial and federal governments and quickly realizes she really has no choice but to accept a 12 year amortization period @ an annual interest rate of 8.25%. Helen makes equal payments of $497.50 for a total borrowing cost of 71,640. Here is the math: $36,000 in principle + $35,640 in interest = 71,640 for a total education cost of $168,640. What you say, Helen has to pay back almost twice her principle amount because she choose to study why the American Empire is a Plague Upon Human Progress. Yes Helen dear, one way or the other you are going to work for the family.
The unknown knowns
Ah you cheeky little devil you failed to mention the government’s generous Income Tax deduction for interest paid on student loans. Quite right you are chap! Lets do the math.
Take scenario A. Why scenario A, you ask? Because in scenario A Helen’s top marginal tax rate is around 45%. This means we can calculate the maximum value of the generous tax credit. Here is the Kicker. You can only claim 17% of the total interest you pay per year on your student loan. In Helen’s case this works out to $504.90 which means Helen will get a refund of …wait for it … $227.20 per year or $1136.02 over 5 years. Which drops her total education cost from $146,850 to $145713.98. Wow what an inducement to invest in human capital.
I would do the calculation for scenario B but I am afraid Helen will faint.
Forgone income: the real cost of education
Let us assume, as Helen is bright and ambitious, she could have been earning $2,000 a month for the eight months she was in school per year during her undergrad. That works out to $16,000 per year for a total of $64,000 which must be added to the cost of her BA which was $50, 000. For a total cost including forgone income of $114,000.
Let us assume for her Ma year with BA in hand she could have earned $3,000 a month for the 12 months she was enrolled which comes to $36,000. Adding this to our total above we get $150,000.
Let us assume for the 6 years she spends as a graduate student she could have been earning $48,000 a year, which sums to $288,000. Adding this to our running total we get $438,000.
Wait you say, that is not a fair accounting of forgone income because she would have had to pay for her living regardless of what she was doing. Quite right. Let us subtract 132,000 for subsistence costs over the 11 years ($1000 per month). That gives us a total of $306,000. Yes, kids that is the total value/cost of your human capital.
Well, ok, $306,000 may be the total cost of her education including forgone income less living costs but you said she got scholarships so it is not the total cost to her. Quite right you are. Helen did receive a total of $5,000 in scholarship money during her BA, $4,000 during her Masters and $72,000 during her Ph.D. for a grand total of $81,000 in free funding. This brings Helen’s total cost out of pocket to $225,000.
That tax credit is still looking like a scam of the first order. And what you have not considered is the obscenity of charging 2.5% above the private banks prime when the government borrows money much cheaper than that. Yes kids the government is making money off of student loans. Not only have they raised our taxes by allowing the cost of education to increase (it is a user fee on a public good), but they have also added insult to injury by making money off the money that they have loaned us to pay for the initial increased tax levy on education.
How are those marginal tax rate reductions looking now?
What is to be done?
In the short run, pay off that student loan as fast as possible. There is no financial or tax incentive to prolong your payments. You can amortize over the full 12 years in order to guard against unforeseen living expenses but make additional payments whenever possible.
In the medium run, tell your government to quit the bullshit and fund education by reducing the cost of tuition. Education would be expensive without tuition. In our example above, tuition only accounts for $66,000 of the total cost of education (assuming $6,000 a year in tuition).
In the long run, as Keynes said we are all dead, but tuition should be free.