Monday, November 12, 2018

Beyond Our Means: Student Debt as a Cultural Sign

In my last post, I tried to explain a series of things about debt and how it functions.  The key points are there and you can refer back to them rather than reading a summary. What I sought to point out is that debt is an odd thing. By going into debt, we end up paying significantly more for a product, say, that we want then the advertised price. Moreover, debt, on a certain level, becomes a serious problem. Defaults can and do occur and these become like dominoes. If I can't pay my bills, the people who are employed by my creditors might start to lose their jobs, etc.

In reality this is a lot more complicated but this basis understanding allows us to look at other, more important and, for me, historically interesting things. Let me begin by saying that debt is a serious problem for a lot of people. You have probably read the stats yourself and so you know that the poorest Canadians are actually getting poorer. What does that mean? It means that the poorest Canadians are going backwards. Far from simply making less money than other Canadians (and so the relative gap between classes widens), they appear to be actually losing money (I got my info from the Broadbent Institute). Debt, IOW, can and does occur for a range of reasons and some of those reasons are simply outside of the control of some people. Stereotypes to one side, losing one's job when the factory closes down, say, is a good way to get into debt fast.

What about saving for a rainy day? The news story I cited in my last post suggests that Canadians are not very good at that and, frankly, that is part of the story I want to tell. Why is that? It is because debt has been naturalized as a good and normal thing. Years ago, a relative who was carrying a lot of debt went to the bank. I was disturbed by their debt services payments (the minimum they had to pay and told them so. IOW, I argued that they were carrying too much debt). Their banker said the opposite: not at all; most people have this much debt. Six months later, the bank refused an application for more credit and ... my relative's business went under.

I don't think the banker was lying. I don't think the debt level was unusual. But I think it is problematic. The naturalization of debt that has occurred in Canada is the product of a series of historical developments. These include:


  • The democratization of credit (it is no longer for the upper class)
  • The development of a set of national institution that manage debt (including, as we saw in 2007-8, the stock market, insurance companies, banks, credit card companies, etc.) 
  • Encouragement by the government 
  • A shift in cultural values

It is these last two points I want to talk about. How has the state encouraged debt? Consider a common element of debt: the student loan, as an example. We all know that education is good. (That, at least is the burden of another series of blogs I am writing and a book I am considering writing.) But, how do we finance education? The range of people we need to make education work has expanded dramatically and they don't work for free. We need not only teachers but janitors, people to fix facilities when roofs leak, repair computers, process book purchases (or, more often database and aggregator purchases) for libraries, people to run experiential learning programs, councillors, heck even people to tune musical instruments. 

I don't debate the usefulness of these people. In fact, I think they are good and I see no point in looking back on the "old days" when we did not need, say, councillors. Those were not necessarily good old days and simply closing one's eyes to the mental health issues does not make them go away. Likewise, students are looking for experiential learning opportunities because they cannot get what they feel are labour market ready skills in other ways. Said differently, they want to work and want their education to help them get jobs. I think both are great. I am glad students want to work and I think that education does and should help equip people for the workforce. 

Yet, the finance issue does not go away simply by stating that this is a good idea. We finance public education through taxes but what about higher education? That is financed through a combination of taxes and direct student (or the families of students) payments. It is one way, but not the only way, to finance higher education. Other countries, in fact, finance higher education in a range of different ways that limit the degree to which students (or, their families) pay out of pocket. As tuition rates have gone up, summer jobs and the like no longer cover most tuition and students (or, their families) have turned to loans to cover the difference, which was the concern of my friend (see last blog) that got me started thinking about debt. 

There are a myriad of ways to think about student debt, all of which can have some importance. We can think of the percent of students who leave higher education with debt. We can think about the way debt accumulates the longer one is in school. We can think about the ability of people who complete higher education to pay back student loans. We can look at who holds that debt (are they government sponsored student loans, loans from banks, money owed friends or family members?). 

Current data from Stats Canada, which you can find here suggests that students leave higher education with appreciable debt. Here is a graph from Stats Canada that illustrates this. 



There are not a lot of surprises here. College students accrue less debt, BA students have less debt than those in doctors degrees. And, average debt is appreciable. 

Debt causes all kinds of problems, as my friend has said on his FB post. For instance, those just entering the labour market often have little ability to pay back their loans but, after a brief waiting period, have seriously high payments. Those payments can be the source of mental anguish. That I do not doubt, but they are also the source of other problems. For instance, they limit the ability of new workers to make significant purchases ... unless they can get further loans ... which has implications for the economy overall.   

They also create -- or, rather, perpetuate -- inequality. After all, the wealthy don't need student loans and so enter the labour market in a much better economic position than those who have students loans even if they have the exact same qualifications. One will begin to accumulate capital, say; the other will not and no amount of "saving for a rainy day" can disguise the brute facts of math. 

I use this example to illustrate how student debt can hamper one of the very things it was supposed to facilitate: equality of opportunity. 

If these things are true -- if other countries finance post-secondary education in different ways; if debt can subvert the very aims of what it was supposed to facilitate; if it can hamper the economy -- why do we have it? 

Well, the first reason is that no one said that the economy made sense or that it was a cohesive whole. Indeed, almost by definition a capitalist economy is neither cohesive nor does it make sense. I wrote a whole series of blogs (Myths of Capitalism) to illustrate this.  We should not, in other words, be surprised that one part of the economy is intended to facilitate one aim (say, social mobility; equality of opportunity through education) and another part (or, even the same part) subverts that aim.  

But, there is a more significant reason. Think about what student loans do: they are a way of financing post-secondary education.  That might sound odd.  After all, most people don't think of student loans in that way. But, think about what they do: they are a specific form of debt designed to pay for -- aka finance -- post-secondary education. Moreover, the amount of money that they move into post-secondary education is appreciable if Stats Canada data is correct. If that data is correct and the average, say, college student takes out an average of, say, $7 000/yr in debt to pay rent and tuition, etc., that is a fair piece of money being put into the economy and into tuition. It finances, in fact, students who otherwise would not be able to attend college for want or resources (under the current system). Thus, while I know student loans pay for more than just tuition; the fact is that without them we'd have far fewer college students -- or, university students -- than we now have. I have not done the math, but I'd guess that students loans are nearly essential for the economic well-being of colleges and universities. That is: without them, there would be so many fewer students that the economic stability of higher education would be threatened. 

We do not often add this up, but it is something to think about. The economic stability of our post-secondary system seems to rely on student loans. 

Student loans are, then, a way of having students finance post-secondary education and that is, in fact, their purpose.  And, because these are loans, they are paid back with interest. There may be a break on a rate or some other allowances that make the loan more palatable, but ultimately, there is an interest rate and so that means that simply by getting a student loan to pay tuition, a student is paying more than the sticker price. As I pointed out in the previous blog, debt services charges (interest) mean that you pay more -- in some cases a lot more -- than the price of the item you are buying if you go in debt (via a loan or whatever) to make that purchase. Thus, tuition has increased for sure over the last generation but by getting loans -- made necessary by these vary increases in tuition -- students are actually paying more than the cost of tuition for their education. 

This much is simple loan math and put in those terms it does not sound particularly good. In my view, it shouldn't. In effect, the state is suggesting, through student loan policy, not only that students should finance higher education but that they should pay more than the advertised price to do so. But that still does not explain is why we have student loans. In fact, it turns it into a bit of a question. What makes it even more interesting is that the state often portrays liberal student loan policies as progressive measures. If tuition goes up, someone will say, yes tuition is going up but we will counter that with bursaries and easier access to loans. Looked at in this light, easier access to loans does not look very progressive. It is a way for students to get an education that they would otherwise be denied. 

Except: why should they be denied it in the first place? We have student loans in preference to other forms of financing, because student loans are consistent with the general tenor of capitalism and individualism and the prevent the growth of taxes. Said differently, they keep a significant burden of financing post-secondary education on students themselves ... on the individual. We have them because the state does not want to increase taxes and spend the extra tax money on higher education. And, these loans seem natural and necessary. 

This also tells us something about saving for a rainy day. Student loans go often go to individuals -- students -- who have had no chance to save for a rainy day because they have not worked or at least not much. Student loans ensure that young people begin their adult lives in debt. 

I am picking on student loans not because I think they are a particular evil. But, because I think they highlight some of the general problems with debt. Think about what they do: 

  • Seem progressive when they are not
  • Ensure that students pay more for education than the advertised price because they have to cover interest charges
  • Keep the burden of financing on students themselves (something that is more and more true over the last generation)
  • Do little to enhance equal opportunity or social mobility and may, in fact, work against it
  • Disguise the fact that we have options and choice with regard to educational financing 
  • Ensure that individuals begin their adult lives in debt 

In short, student loans, as a particular form of debt, illustrate some of the odd cultural and economic dynamics of debt. As a sign of the time, they illustrate the odd and contradictory nature of our culture which mistakes self-financing for state involvement, regressive measures for progressive measures, and promotes economic instability in the name of promoting equality of opportunity. In short, as a sign of the times, student loans seem to me to be near perfect ... I just don't like the directions in which those signs are pointing. 

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