High-interest student loans a burden for graduates

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      Jenn Duong has fond memories of her political-science studies at UBC. It was only after graduation that she learned they came with a bigger price than she anticipated.

      Duong, 25, borrowed $29,000 from the federal and provincial student-loan programs to finance her education. Now working for a bank, she said she is shocked that she must pay higher interest rates than those with conventional bank loans.

      “I think it’s unfair that someone can take out a loan with the government that has a higher interest rate than taking one out from the bank,” Duong said in a phone interview with the Georgia Straight.

      She’s not alone. According to Vancouver financial writer Jeannine Mitchell—who operates the Debt 101 Web site—young people across the country are contributing huge sums of money to a bureaucratic system financed, in part, by excessive student-loan interest rates. “The net annual cost of running the Canada Student Loans Program is over half a billion,” Mitchell said in a phone interview. “I think that Canada’s high student-loan interest rates have more to do with our expensive student-loans system than with banking arguments about student-loan risk.”

      Duong decided to lock in at a fixed interest rate of almost 10 percent four years ago. This came after a student-loan official warned her that interest rates were bound to go up. After noticing that her payments had barely made a dent in her B.C. student loan (after three years of monthly payments, her loan had only been reduced by $1,300), she took out a line of credit—with a lower interest rate from the bank—and paid off the $6,000 provincial portion of her debt.

      Duong is trying to purchase her first home, but says her remaining $23,000 federal student loan makes it unlikely she’ll qualify for a mortgage. “This is a huge amount of debt,” she said, “especially since they [the government] want you to start buying and stimulating the economy; they keep encouraging first-time home buyers. But half of first-time home buyers have these high-interest student loans, and they can’t get a mortgage.”

      According to the Canada Student Loans Program annual report from 2005-06 (the most recently published relevant numbers), the amount allocated to federal student-loan programs totalled $931.1 million; of that amount $395.6 million was revenue from loan interest charges.

      Ottawa requires students to pay at either a fixed or a floating rate. As stated on the federal government’s Web site, fixed-rate loans require students to pay prime (currently 2.25 percent) plus five percent. A floating rate is dependent on the current interest rate—for example, it’s now at prime plus 2.5 percent. Students can be paying as much as 7.25 percent interest on their student loans.

      Mitchell blamed Canada’s needlessly complicated student-loan system for the high interest rates. “It’s a kind of a Rube Goldberg machine,” she said. “We have federal, provincial, and territorial loans bureaucracies running different privatized service centres and all kinds of complicated repayment programs. To jack the costs even higher, these systems and programs keep changing.”

      Mitchell said she wants an overhaul of the system and some movement toward a free postsecondary-education system. “If you look at most advanced economies, they tend to give free or cheap tuitions, and they often have quite generous grants,” she said, noting Ireland, France, and Scandinavia as places where tuition is free. Other countries, such as New Zealand, have done away with interest charges on student loans.

      The only Conservative cabinet minister from Metro Vancouver, James Moore, was not available for comment by deadline. Burnaby-Douglas NDP MP Bill Siksay—whose riding includes Simon Fraser University—told the Straight in a phone interview that student-loan interest rates are a symptom of a bigger issue: student debt and overall government support of postsecondary education. Like Mitchell, he thinks it’s time to start thinking about eliminating tuition fees.

      “We really need to get to the point of dealing with why we’ve decided it’s appropriate for people to run up huge debts to get their education so they can make their way in the world,” Siksay said.

      However, Liberal MP Joyce Murray—whose riding includes UBC—argues that not all debt burdens are bad. “I think that it’s actually positive for students to have some part of investment in their education,” Murray told the Straight over the phone. “So, that being said, we need it to be a reasonable burden, not an unreasonable one at the end of the day.”

      Duong said she understands Murray’s point—and sees her education as an investment—but contends that the student-loan system doesn’t make it easy for young people. “I have this huge financial burden that is preventing me from doing a lot of the things I want to do,” Duong said. “I think if I didn’t have this to worry about, I would have taken a job that I was 100-percent happy with or been able to travel. But instead, I have to worry about paying off this loan and the interest that keeps incurring on it.”

      Comments

      21 Comments

      real life

      Aug 27, 2009 at 10:37am

      Boo Hoo! I don't have a perfect job. I can't travel. Welcome to the real world, where the majority of people don't work at a job they're 100 % happy with and only get to travel if they manage to save enough money after paying all their bills. As for a qualifying for a mortgage. You've just graduated! What universe are you living in that you feel that a person just starting to work a full time job with the economy the way it is should be able to qualify for a mortgage. There are women/men who have been working for decades, that still can't afford to buy a house. Why should you be any different. My advice to you is, suck it up, work hard at the job you have, pay off your loan and if you're lucky, in a decade or so you might be able to afford to buy a starter house in the burbs.

      ps. in case your wondering, I'm just your everyday working stiff, married with a child. My wife and I both work full time to pay the bills, we don't own a house but nevertheless find our life to be relatively pleasant.

      YL

      Aug 27, 2009 at 10:53am

      Good point about how the student loan system is behind the time, and too bureaucratic. System needs to be over hauled for sure. BUT the free education piece..woulnd't that be nice..but you can't have your cake and eat it too. You do realize that European countries with cheaper or 'free' post secondary education also tax their citizens much more than Canada right?! If we did that then she'll be complaining about how high taxes are inhibitating her from buying her first home.

      Broke-n

      Aug 27, 2009 at 11:23am

      I paid off my BC/Canada studen loan many years ago, now I'm paying off the interest. Though I did appreciate the money when I was in school I have to say I would have chosen a cheaper and wiser route knowing that I would be paying off this loan for 15+ years. The interest rates are steeper then most credit cards and take advantage of young students with very little knowledge of loans, including myself. I can't imagine the debt that students will be paying off in the future with the insane costs of education today.

      Jen

      Aug 27, 2009 at 11:53am

      Agreed - post-secondary education is unreachably expensive for too much of the population.

      That said, nobody should be surprised by the rates and terms on any loan they sign up for, ever. That's just called being financially responsible.

      I'd also like to see the interest rate on any other loan where you can defer the first payment for up to 10 years with no interest accrued (as long as you're in school); where your payments are fixed, no matter what the interest rate is if you opted for a floating rate; where you can call and defer payments and have the lender pay your interest for up to 6 months at a time; where you get to write off a portion of the interest paid on your taxes; and where you get access to tens of thousands of dollars, without actually having a guaranteed means of paying it off.

      I regularly see lines of credit with floating rates of prime plus 2.5%, and fixed mortgages are over 8% above prime to sign on for 10 years, nevermind the 15 (or more) that student loans are amortized at.

      Sounds like Ms. Duong needs to get her head screwed on straight, be thankful we have robust provincial/territorial and federal loans programs she could access for such reasonable rates while being such a high credit risk, and start putting in some overtime to pay them off quicker.

      And for the record, I have student loans, and a mortgage. And I'm smart enough to know how fortunate I am to be in a position where I have either.

      Former Student

      Aug 27, 2009 at 12:07pm

      Complaining that the interest rates are too high when you *voluntarily* locked in at 10% is rediculous. You would think people who are going to university would be smart enough to do math......

      Why is it that people agree to interest rates when applying for loans / credit cards / etc, then whine that their bills are too high?
      (by the way I have had high interest credit cards, and had student loans - my choices - so I had to pay them back. It took 7 years, but it is all over with now - no complaining)

      Duane Storey

      Aug 27, 2009 at 1:15pm

      I just want to point out that there's pretty much zero risk for the lender. You're not allowed to declare bankruptcy on a student loan in Canada, which means eventually you'll have to pay it all back. That's in stark contrast to pretty much every other form of credit you can obtain.

      Let's also be clear that the banks aren't doing anyone a favor -- the interest during the period when you're in school is covered by the government. It's just another form of subsidizing education. From the lender's perspective, they're making money 100% of the time. When you're done school, you can defer the first payment for up to 6 months, but the interest is accumulating during that period, and I got slapped with another $2,000 of interest during that period.

      In terms of deferring payments on a loan, it's not as easy as you make it out to be. Normally you have to prove severe economic hardship to qualify. Banks will typically do the same thing on normal loans when possible, so this isn't a benefit that only applies to student loans.

      rin

      Aug 28, 2009 at 9:17am

      Is everyone forgetting that we're talking about 18 or 19 year old students who are aggressively recruited for these loans? These are very young and inexperienced people who've been lied to their whole lives that if they go to university a perfect job will be waiting for them on a silver platter at the end of it. It's also mostly people whose families can't afford to send them to school any other way, and are told that their way out of poverty is university. It's starting to smack of predatory mortgage lending in the US, lenders dangling a shiny future in front of people who don't know what they're getting themselves into and then getting all the benefits. How is this ethical? How is this good for society? Because that's what education is supposed to be, right? Right now it seems like it's only good for the banks and the bureaucrats who manage the system.

      Mike Hansen

      Aug 28, 2009 at 3:56pm

      This is the only way they can learn to be 'good little workers', being burdened by debt.

      Anon

      Aug 30, 2009 at 10:51pm

      Quit your complaining Jenn. Should have saved up in highschool and saved your money instead of partying it up. Welcome to real life. Grow up.

      Disappointed

      Aug 31, 2009 at 1:08pm

      Shadi Elien, shame on you. Do you do a story about Ms. Duong because she's your friend that complains the most? There are people out there who are in way worst financial troubles than Ms Doung and for more noteworthy reasons. Was this actually a phone interview, or just a random chat while going out one night?