How much does the government stand to gain on the tuition hikes following the measures announced today?

Thursday, April 5, 2012

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Today, Minister of Education Line Beauchamp and Finance Minister Raymond Bachand announced new measures to be taken in improving the accessibility of education, in line with the planned increase in tuition fees.

They announce an increase in loans to be made available to some families, as well as the possibility of income-based repayment (IBR/RCR).

Just how costly are these measures? It is difficult to say because the two Ministers reveal the numbers only in part, detailing the extent to which loans will be increased, but leaving information surrounding the additional RPR out of the discussion for the moment. It is up to us to evaluate the cost and benefits of these new measures taken by the government.

Exactly how much money would the increase amount to?

According to the Government's University Finance Plan, the increase in tuition fees represents an additional $332 million coming in to the government. Taking into account the increase in loans for low-income families, a total of $265 million would be received, according to the Finance Plan.

In fact, a study published recently by the IREC (Institut de Recherche en Économie Contemporaine) shows that the government had made an inaccurate assessment with regards to the cost of providing financial aid, especially when taking into account the tuition tax credit. IREC affirms that the Government underestimates the costs of taking such measures by $76 million. Subtract this from the $265 million in tuition increases, and the total income from students amounts to $189 million.

The price to pay for the new measures implemented by the Government

The government has indicated that the proposed increase in loans represents $21 million less in the hands of the State. The hope is that this money will be compensated for by further private donations given to Universities, but it is safe to say that this may be far from the realitu of the situation — an influx of funds from private donors would have its own consequences, if it should occur in the first place. Rather, the increase frankly means an additional $168 million dollars in additional government revenu supplied by students paying increased tuition fees.

Now, the core question: what is the cost of implementing income-based repayment (RPR)? Given the vague terms outlining the new measures, it is very difficult to say.

The Government already offers a deferred reimbursement program (DRP/PRD) which allows the students who have difficulty repaying their loans "to postpone by a few months the repayment of their debt without accumulating interest during that period". In 2009-2010 this program was offered to 13 296 students who saw an average interest of $335 paid by the Government at a total cost of 4.5 M$.



Well, to assess the costs of this measure which does not yet exist, it is necessary to understand how the Government will support those who will repay their loans. Looking at various scenarios from previous situations, we can propose several plausible options such as:

(1) The Government would support loan holders with incomes amounting to less than $ 35,000 (roughly the average income) for a longer repayment period, and with low interests (otherwise, the IBR would simply force those of lower-income to pay more interest).

(2) The remainder of the loan holders would receive payments according to their income, without added interest.

(3) We assume here that the Government will not apply the proposition put forth by Luc Godbout, which suggested that all loans must be repaid over the course of 10 or 12 years (the Government fails to mention this, and lack of data makes it hard to evaluate the situation).

If we take the logic of these proposals seriously, we can: consider the average financial aid granted to students with IBR, and apply it to all students who make less than $35 000 and have loans to pay (meaning that the government effectively pays half of their yearly interest). This is a rather fragile hypothesis… but for the moment the Government isn't providing enough information for us to properly analyze the new measures, and suggest alternatives.

Financial statistics tell us that 39% of people who are entitled to the tax credit for interest paid on student loans make less than $35 000. This accounts for 61 331 people. The IBR will obviously only be applied to new loans, so the cost of this new initiative can only be calculated from the moment students will begin to pay into new loans.

If, and it's a big assumption, the number of students eligible for loans remains the same until the IBR is to be introduced, and it pays $355 million into the current deferred loan program, then the cost of the IBR would be $22 million.

This would bring the value of the increase to $146 million in the hands of the government, while students have had a total of $332 million taken from their pockets. This amount represents less than 1% (0.97%) of the total budget of the Ministry for Education. Of course this figure is highly speculative: the numbers given here are mere estimations, and do not necessarily end up in the same locations (tuition fees go to universities while the tax credits are given by the federal government), but the relatively insignificant asked of students begs the question of whether we are still caught up in a public finance debate, or a purely political standoff.

Source (french): IRIS