New Lifelong Learning Initiatives in Budget 2017

Last week’s federal budget proposed to improve access to education funding with a series of new initiatives including improved access to bonds, loans and grants. Planning for student debt repayment, however, should be a critical first step with students, alongside the application process. Tax and financial planners can be of important assistance.

Many of these measures are expected to benefit Canadian women in particular, who often strive to improve their career prospects while balancing family responsibilities.

Access to the Canada Learning Bond, will be improved, allowing low-income families to get a head start on saving for postsecondary education. When families are able to get an early start in saving for postsecondary education, the benefits are two-fold: it makes postsecondary education more affordable, and reduces student debt loads upon graduation.

The changes outlined in Budget 2017 will result in more students qualifying for assistance through additional Canada Student Loans and Grants. Around 10,000 part-time students will become newly eligible, and an estimated 13,000 students with dependants will become newly eligible for Canada Student Grants each year.

In 2012, Statistics Canada reported that student loans accounted for $28.2 Billion of total debt owed by all Canadians, the fourth-largest source of debt after mortgages, lines of credit, vehicle loans and credit cards balances.

Studies published by Statistics Canada between 2009 and 2014 showed that at the time of graduation, 43% of college graduates, 50% of bachelor graduates, 44% of master’s and 41% of doctorate graduates relied on government or non-government student loans, which include private, family and bank loans, to help finance their education.

Three years after graduation, across all levels of education, at least one-third of graduates with student debt had paid off their student loans. This proportion was lowest among bachelor graduates (34%), similar for college and doctorate graduates (36%) and highest for master’s graduates (44%). Four in 10 graduates chose to continue their postsecondary education after graduating from their program.

Budget 2017 also proposes to provide more vulnerable youth with the supports they need to succeed in school, including tutoring, career mentoring and financial help, such as scholarships and internships through renewed support for Pathways to Education Canada, a charitable organization that helps youth in lower-income communities across Canada complete high school and successfully transition into postsecondary education and employment. The renewed funding intends to provide $38 million over four years, starting in 2018-19.

While additional funding is always welcome, and it does support the mandate of skills and innovation and helping middle-class families as laid out in the new budget, the current economic data suggests that the cost of servicing outstanding student loans (and adding to them) may offset some of the benefits that enhanced education may provide.

What does this mean to students in the current economic climate when two-thirds of graduates carry debt into their post-graduate years?

From 2016-21, GDP is forecast to grow by a tepid 1.7% while the Consumer Price Index is forecast to rise by 1.9%. It will be increasingly challenging to find low-risk investments yielding a positive rate of return after tax and after inflation.

Interest rates for Canada Student Loans issued on or after August 1, 1995, are prime +5% for fixed-rate loans, and prime +2.5% for variable- or floating-rate loans. The Bank of Canada prime rate is currently 2.70%.

While there is a six-month non-payment grace period allowed following graduation, interest on the Canada Student Loan does accrue. Current rates range from 5.2% on variable to 7.7% on fixed rate loans.

From a planning perspective, it is important to consider how best to eliminate this debt as quickly as possible to prevent interest accruing at a faster rate on borrowed money than is potentially available on lower-risk investments. In other words, debt can grow faster than investments, working against one’s net worth, instead of helping to build it.

It is particularly important to look at ways to minimize student loans as quickly as possible, especially in a climate where it is becoming easier to borrow money and harder to pay it back. Without proper evaluation and planning, the effectiveness of these programs may yield greater benefits to the government than to students over time.

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