Section 3: Student loans and debts

Students making their way through the Canadian postsecondary education system are faced with costs that vary along a number of dimensions, including the level of education and field of study, the province of their educational institution, and the time spent completing their degree. When choosing to finance their postsecondary education, students can opt for any combination of government student loans, employment earnings, private loans, family support, and savings, among others. For many, both government and non-government student debt becomes an integral component of life after graduation. The following section provides an overview of different forms of student debt and their relation to education levels. Specifically, it will start with graduates who owed to either government or non-government sources, followed by graduates owing to non-government sources, graduates owing to only government sources, and finally, graduates owing both types of debt. All analyses in the following section were limited to graduates that did not pursue further education within the two years after graduation.

3.1 Overview of student debt

Nearly half of all graduates in 2005 that did not pursue further education had some form of student debt upon graduation

Out of the 194,600 graduates of 2005 that did not pursue further education, 49% of them financed their postsecondary education with some form of education-related loan. The proportion of graduates owing money to any source at graduation varied across the educational levels, from 44% of doctoral graduates to 54% of bachelor graduates.

Figure 3.1 Schematic diagram of student related debt

Information on student loans in the National Graduates Survey (Class of 2005)

Respondents of the National Graduates Survey were asked questions on the amount and type of loans they had used to finance their education. This included information on debt that was financed through government or non-government sources and the corresponding amounts. For example, government-financed loans would be considered a government source while private, bank, or family loans would be considered as non-government sources. The amount that graduates owed at the time of graduation may include debt accumulated from past postsecondary education and may not be directly related to the most recent degree, diploma or certificate. For the purpose of this analysis, only graduates that did not pursue further education in the two years upon graduation and thus required to start paying back their student debt are included.

Similarly, of the graduates that held debt related to financing their education, substantial variation existed in their average debt levels from all sources, ranging from $13,600 to $25,600. College graduates1, characterized by shorter program durations, had the lowest average overall debt level, followed by bachelor, master, and finally doctorate graduates. Chart 3.2 shows the percentage of graduates owing money to all sources and the average amount of debt upon graduation at each level of education.

Chart 3.2 Incidence and average amount of debt to all sources (government and non-government) at time of graduation, by level of study

Out of the 54% of bachelor graduates who had some form of student debt at graduation (roughly 51,000 graduates), almost 80% of them had a government debt. This was similar across all levels of education: 76% (of the 45%) of college graduates, 74% (of the 46%) at the master level and 77% (of the 44%) of doctorates. The average debt levels of these student loans were very similar to the average debt of graduates that owed only to government sources (see table A.7 in appendix).

Despite average debt loads exceeding $20,000 for graduates with student debt at the bachelor, master, and doctorate levels, about a quarter had paid off their overall debt two years after graduating. Master degree graduates had the highest proportion (32%) that had paid off their student related debt (both government and non-government), followed by doctorate (30%), bachelor (28%), and finally college graduates (24%).

One in nine graduates had debt owing only to non-government sources, with little variation across education levels

About 22,000 graduates – or 11% of all graduates from 2005 who did not pursue further education – owed debt only to non-government sources. Non-government student loans, consisting mostly of private, bank or family loans, varied little across the educational levels, with a range of 10% of doctorates to 12% of masters.

The average debt size of graduates owing only non-government student loans, however, showed that higher levels of education were associated with higher levels of debt. Chart 3.3 shows that the average debt owed only to non-government sources at graduation ranged from $9,300 at the college level to over $20,000 at the master level.

Chart 3.3 Incidence and average amount of debt to non-government sources only at time of graduation, by level of study

There was a large proportion of graduates that had paid off their non-government student debt entirely two years after completing their 2005 diploma or degree. Overall, 43% of all 2005 graduates owing only to non-government sources had fully paid off their student debt two years after graduation, with bachelor graduates having the highest proportion (45%) followed by doctorate graduates (42%), and college and masters (41%).

About a quarter of graduates who did not pursue further education owed only to government-financed student loans

Roughly 50,000 graduates – or about 26% of all 2005 graduates who did not pursue further education – owed money only to government sources upon graduation. The proportion of graduates owing across the educational levels did not differ substantially, with 25% of college graduates, 24% of master and doctorate graduates, and 27% at the bachelor level.

The average debt size of graduates owing only to government sources was highest among doctorates ($21,600) and was lowest for college graduates ($12,300). Bachelor graduates, representing almost half of all graduates owing only government student loans at graduation, owed on average $18,200. Chart 3.4 shows the distribution of graduates that owed only to government sources and the average size of this debt.

Chart 3.4 Incidence and average amount of debt to government sources only at time of graduation, by level of study

Overall, nearly 14,000 graduates – or roughly 27% of those owing only to government sources at time of graduation – had paid off their debt two years later. The proportion differed across the education spectrum with graduates from a master degree having the highest proportion paying off this debt (34%), followed by doctorate graduates (33%), bachelor (31%), and lastly, college (20%).

Roughly 12% of graduates who did not pursue further education owed to both government and non-government sources

Over one in seven bachelor graduates who did not pursue further education owed to government and non-government sources. Similarly, about 10% of graduates from master and doctorate programs owed to both sources. Chart 3.5 shows, similar to charts 3.2, 3.3, and 3.4, the incidence and average amount of debt owed to both sources (government and non-government) by level of education.

Chart 3.5 Incidence and average amount of debt of graduates owing to both government and non-government sources at time of graduation, by level of study

While the proportion of graduates owing to both sources of debt was not remarkably high, in relative terms, the average amount owed differed substantially from those that owed to only one type of debt source.

The first substantial difference apparent in Chart 3.6 below was the magnitude of the average debt owed relative to average amounts owed to single sources. For example, the average debt of a graduate with a college degree who owed to both sources at graduation was $1,000 more than combining both the average debt of those who owed only to government sources with the average debt of those who owed only to non-government sources at the college level.

The second substantial contrast apparent from Chart 3.6 was the difference in average debt amounts between levels of education. The difference between the average debt (for those owing to both sources) of a college graduate and that of a bachelor graduate was $14,400. A further and more complete analysis should be undertaken on the composition of debt of these graduates.

Chart 3.6 Average amount owed to government sources only, non-government sources only, and both sources, by level of study

The next section will discuss how the proportion of graduates owing debt (both government and non-government), as well as how much they owed on average have changed compared to graduates of 2000. For comparison purposes, all forms of debt were converted to 2007 constant dollars.

The proportion of graduates with any debt upon graduation and the average size of this debt were similar for the 2000 and 2005 graduating classes

As indicated earlier, roughly half of all 2005 graduates who did not pursue further education owed money to either a government or non-government source for their post-secondary education. This proportion was almost identical to the proportion of graduates of 2000 who owed debt to any source (50%). Given that the 2005 class represented a higher number of graduates than all of the previous graduating cohorts, the number of graduates with any source of debt rose from 89,700 in 2000 to 96,300 in 2005.

The average debt from all sources in constant 2007 dollars among members of the 2005 cohort that owed student related debt did not differ much from the class of 2000. The differences, albeit small, revealed that graduates from 2005 with student debt had lower average debt levels than their 2000 counterparts: doctorate graduates owed about $1,300 less on average while college graduates owed about $700 less.

Graduates from the Class of 2005 owing only to non-government sources, tended to owe more on average than their 2000 counterparts across all levels of education

The 2005 graduating class had a higher proportion of graduates that owed only to non-government sources, and the average debt level of these graduates was higher relative to similar graduates of 2000. Specifically, 2005 college diploma holders owed about $1,4002 more, bachelors owed about $3,600 more, and master graduates about $4,100 more. In terms of percentage differences, bachelor graduates with non-government debt only owed 32% more than bachelor degree holders of 2000 while 2005 master graduates owed 24% more than their 2000 counterparts. Table 3.1 shows that the proportion of graduates and their average debt level (non-government only) was higher in 2005 than in 2000 across most levels of education.

Table 3.1 Proportion and average debt (in 2007 constant dollars) of 2000 and 2005 graduates owing to non-government sources only, by level of study

The proportion of graduates owing only to government sources and their average debt load was lower among 2005 graduates relative to the 2000 cohort

Across all levels of education in 2005, the proportion of graduates who owed only to government sources dropped from the levels observed in 2000: table 3.2 reveals that there was an 8 percentage point decline in the proportion of college graduates with only government debt, a 7 percentage point decline at the bachelor level, a 6 percentage point decrease for masters graduates, and finally, 2 percentage points at the doctorate level.

Not only were the proportion of graduates owing only to government debt lower in 2005 compared to graduates of 2000 but the average debt level on these loans was lower than the levels of 2000 with the exception at the doctorate level. The largest difference in the average government debt level between 2005 and 2000 graduates was at the bachelor level, where 2005 graduates owed about $3,600 less.

Table 3.2 Proportion and average debt (in 2007 constant dollars) of 2000 and 2005 graduates owing to government sources only, by level of study

In line with lower average debt levels (government sources only), the proportion of graduates with debt at graduation and who had paid off their government debt two years after graduating was higher among the 2005 cohort than the 2000 cohort (see Table 3.3 below).

Table 3.3 Proportion of 2000 and 2005 graduates who had paid off their government debt two years after graduation, by level of study

A comparison between the two cohorts (Class of 2000 and Class of 2005) reveals that the proportions of graduates owing to both sources of student debt did not differ substantially for most levels of study. There was, however, a 4 percentage point increase in the proportion of bachelor graduates who owed to both government and non-government sources at graduation. If we convert the 2000 and 2005 debt owed to both sources at graduation to constant 2007 dollars, graduates of 2000 who owed to both sources of debt had higher average debt loads at the master and doctorate levels while graduates of 2005 with both types of loans had higher average debt at the college and bachelor levels. Table 3.4 shows the average amount of debt owed to both sources and the monetary difference between the two graduating classes.

Table 3.4 Proportion and average debt (in 2007 constant dollars) of 2000 and 2005 graduates owing to both government and non-government sources, by level of study

3.2 Government-financed student debt

The overview of debt (government and non-government) from the previous section revealed that graduates of 2000 and 2005 used debt to finance their education that varied in the size and whether it was a government or non-government loan. The graduates of the 2005 class who had debt were more likely to have owed only to non-government sources – and have larger average debt. Conversely, they were less likely to owe only to government sources – and their average debt was smaller. The average debt sizes also showed that some graduates had substantial financial burden once graduated. From this perspective, some graduates – especially those considered to have large debt – could have difficulties repaying their debt.

With a focus on government-financed student debt, the next section will outline large debt loads, personal income, difficulties in debt repayment, and debt-servicing ratios of graduates that did not complete any further education. The reader should make note that all references to debt in the next section refer to graduates who had government debt at graduation, and not the entire universe of 2005 graduates.

Overall, a number of students accumulated government-financed student debts of $25,000 or more at all levels of education

Out of the Class of 2005 who had government student loans, a substantial proportion of graduates with a college, bachelor, master or doctorate degree accumulated large debt loads – debt of $25,000 or more. Doctorate graduates with government debt had the largest proportion with large loans (35%) followed by bachelor (32%), master (27%) and college graduates (12%). Moreover, variation existed in the proportion of graduates with large debt across fields of study within each level of education. For example, 47% of college Humanities graduates and 11% of college Business graduates had large debt loads upon graduation. Chart 3.7 shows the size of average debt at graduation and the distribution of bachelor graduates across fields of study with large debt loads.3

Chart 3.7 Distribution of average debt across fields of study at the bachelor level and proportion of graduates within each field with large debt loads

Interestingly from Chart 3.7, graduates from Business, management and public administration not only had the lowest average debt but also the lowest proportion of graduates with large debt loads. Health, parks, recreation and fitness – a field that included Medicine – had the highest average debt load ($23,600) and also had the highest proportion with large debt loads (39%).

Understanding the distribution of student debt: Small, Medium, and Large debt loads

The amount of debt that students undertake for postsecondary education can vary by the level of education, the province in which the educational institution was located, and duration of time spent in the degree. For the purpose of the report, three levels of debt were used: small debt – under $10,000, medium debt – $10,000 to $24,999, and large debt – $25,000 or more.

Those with higher levels of debt at graduation were less likely to pay it off in two years. Graduates from a bachelor degree who were still paying down their debt two years after they graduated were over two times more likely to have had large government debt ($25,000 or more). The results were paralleled at the master and doctorate levels.

Comparing graduates across cohorts, the proportion with a large debt load at graduation remained virtually unchanged. There was one exception, however: doctorate graduates of 2005 were more likely to have large debt loads than their 2000 counterparts. Table 3.5 partitions graduates with a government debt into two categories: 1) those that were still repaying their student debt two years after graduation and 2) those that were finished repaying their government student loans. Considering just graduates who were still paying off their government debt two years after graduation, few differences in proportions with large debt were found across cohorts, except at the doctorate level (32% had a large debt at graduation in 2000 compared to 40% in 2005). Although the proportion of graduates with large debt at graduation was similar for master graduates and higher for doctorate graduates from the 2005 cohort, more master and doctorate graduates had paid off their loans two years after graduation compared to the 2000 cohort.

Table 3.5 Proportion of graduates with large government debt at graduation for those who were still paying two years later and those who were not, by level of study

On average, graduates that were still paying off their government debt two years after graduation earned less than graduates that had completely paid off their student loans

Overall, higher average earned income in 2006 was associated with higher levels of education for both those that had paid off their debt and those that were still paying. Interestingly, the earned income in 2006 was larger at each education level for graduates who managed to pay off their government-financed student debt relative to those who were in the midst of paying it off. Bachelor graduates who had paid off their debt earned over $8,000 dollars more – or roughly 23% more – than their counterparts that had debt two years after graduation. Similar results were found for college (7%), master (27%), and doctorate (7%) graduates.

Employment rates did not differ between the two groups of graduates (who had and had not paid off their student debt) at the college and bachelor levels but there were somewhat large differences at the master and doctorate levels. Master graduates who had paid off their government debt had an employment rate that was 6 percentage points higher while doctorate graduates had an employment rate 3 percentage points higher.

Comparisons between the 2005 and 2000 graduating classes show that, overall, average earned income (in 2007 constant dollars) differed at the bachelor and doctorate levels across cohorts: bachelors of 2005 who had government debt at graduation earned roughly $2,500 more than similarly defined graduates of 2000. Doctorates with a government related student debt at graduation earned roughly $9,500 dollars less (in 2007 constant dollars). Separating graduates into those with debt paid off and those still owing, certain 2005 graduates fared better than graduates of 2000, while others did worse. Bachelor graduates who accumulated debt during their degree and were without debt two years later (class of 2005) earned 12% more on average than similar bachelor graduates of 2000. On the other hand, 2005 college and doctorate graduates earned 10% and 14%, respectively, less than college and doctorate graduates of 2000.

In terms of graduates still paying off debt two years after graduation, only doctorate graduates from 2005 differed from their 2000 counterparts: they earned about $9,000 less or 85% of what the 2000 graduates earned. There was little that separated the cohorts in terms of employment rates.

About one in four graduates with government debt at graduation in 2005 reported difficulty in repaying their loans

Table 3.6 shows that graduates with government debt at graduation experienced hardship in repaying their loans at every level of education. The proportion of graduates that reported difficulties varied from a high of 29% at the college level to 23% of master graduates. Interestingly, even those that paid off their government-financed student debt reported payment difficulties: 13% among college graduates, 11% of bachelor, 16% at the master level, and 17% of doctorate. However, those still repaying their debt two years after graduation, at every level, were substantially more likely to report difficulties paying. It would be interesting to investigate why graduates have difficulties repaying their student debt. For example, are graduates having difficulties repaying the debt they incurred from their studies because they have taken other types of debt that pertain to life in general such as credit cards, mortgage payments, car loans or private loans?

Table 3.6 Proportion of graduates reporting difficulty repaying their government student debt for those who were still paying two years after graduation and those who were not, by level of study

Calculation of debt repayment

The analysis of debt repayment was based on two guiding principles: 1) intra-cohort comparisons (between graduates of a specific year); and 2) inter-cohort comparisons (between similar graduates across graduating years). Comparisons of debt can prove to be difficult: do we compare constant dollars (adjusted for inflation) at some base year, or current dollars for the year in which the debt was reported? In this report, comparisons of debt across graduating classes used a constant 2007 base dollar. Conversely, for the reason outlined in the following paragraph, comparisons of debt within classes did not use an inflation adjustment.

The rationale for not using an inflation adjustment for within-cohort comparisons followed from Allen and Vaillancourt (2004) and can be illustrated with an example: respondents could have appeared to have paid off debt despite not doing so. If a respondent owed $1,000 at graduation and $1,000 two years later, converting the debt two years later to a constant base of the graduation year with a 3% inflation rate would suggest that the respondent paid off about 5% (($943 - $1,000) / $1,000) of their debt, when in fact they did not.

Finding similarities and contrasts across cohorts (2005 class relative to 2000 class) revealed that a higher incidence of reported difficulties in debt repayment was linked to lower levels of education for both 2005 and 2000 graduates with debt at graduation: it was highest among college graduates and lowest among master (lowest among doctorate in 2000).

In terms of contrasts across cohorts, there were minor differences in repayment difficulties at each level of education, however doctorate graduates of 2005 with debt were more likely to report difficulties repaying their debt compared to their peers of 2000 (a 7 percentage point difference). Finally, looking at repayment difficulties of graduates who had paid off their debt completely revealed that the recent cohort (2005) was more likely to report difficulties than their predecessors.

3.3 Profile of the size of student debt at graduation

Student debt of $25,000 or more was classified as large, as accumulation of debt of this size represents a substantial financial burden for most graduates. But what about graduates who have managed to keep their government student debt at lower levels? For example, what is the distribution of graduates with small, medium or large debt? Does this distribution differ across levels of education? This section profiles graduates in terms of average debt, earned income, and difficulties repaying their debt across the different levels of education.

College graduates had the highest proportion with small debt (under $10,000)

A larger proportion of college graduates who owed money to government student loans at graduation (46%) finished their studies with relatively small debts, compared to graduates at the bachelor (28%), master (28%), and doctorate (21%) levels. However, the average debt level of college graduates with a small debt load at graduation was not different than other graduates at the bachelor, master, and doctorate levels. In other words, those that had small debt upon graduating had roughly the same average debt load across all levels of education.

Directly linked to the classification of debt sizes were the number of graduates that were debt-free4 two years after graduating. Bachelor graduates with small debt were the most likely to have their debt paid off – 53% had their small debt paid off – while college graduates were the least likely – 30% paid off their small debt two years after graduating.

Not surprisingly, graduates with large debt loads at all levels of education were the least likely to have their debt paid off two years after graduating.

Chart 3.8 Distribution of debt size and average amount of government debt, by level of study

Doctorate graduates not only had the highest proportion with large debt, but those with large debt had the highest average debt load

Chart 3.8 also reveals that doctorate graduates who had a large debt load (35%) had an average government debt over $41,000. Finally, the proportion of graduates with medium sized ($10,000 to $24,999) debt was highest amongst master graduates (45%) but was not considerably higher than observed at the bachelor (40%), college (42%) or doctorate levels (43%).

Graduates with large debt, and to some extent those with medium sized debt, reported difficulties repaying their loans

At each level of education, there were a number of graduates who reported difficulties repaying their debt. The largest proportions of graduates with difficulties were found at the large and medium debt categories. Specifically, about 45% of graduates with large debt and over a quarter of graduates with medium sized debt reported difficulties. At the lowest debt category, about 14% of graduates reported difficulties repaying their government student loans.

Taking each level of education separately, college graduates were the most likely to report difficulties repaying at each level of debt. Table 3.7 shows the proportion of graduates who reported difficulties repaying their government student loans by level of study.

Table 3.7 Proportion of 2005 graduates who reported difficulties repaying their government student loans, by size of debt and level of study

Interpretation of debt service ratios

Debt service ratios are crude monetary measures of financial burden – or ability to pay - and are expressed in percentage terms. They are calculated as the ratio of debt payments to earned income during a particular time frame and are interpreted as the percentage of income devoted to debt repayments. Debt service ratios can be high for a number of reasons, which include involuntary low income or voluntary high payments.

While far from conclusive, a number of American studies on student debt burdens have often used 8% as a benchmark: graduates beyond this threshold are thought to have debt that is difficult to manage. In the Canadian context, graduates with trouble managing student debt could utilize the Revision of Terms feature: it provides the borrower with the flexibility to manage their loan repayment in a way that is responsive to their situation. It can be used as a debt management measure designed to decrease monthly payments – and burden. Conversely, it can be used to pay off debt faster through negotiated increases in loan payments.

Directly related to income is the average amount paid towards student debt in a given year (see textbox on Interpretation of debt service ratios). Graduates who are no longer in school are required to start paying back their government student loans, usually on terms set from the onset of the agreement. The amount that is paid in any given year reflects the size of the debt, the interest rate, earnings and the length of time over which the loan is to be paid back. As a proxy for determining debt burden, debt-servicing ratios were used5. While this is a somewhat crude measure, a number of studies have established benchmarks on debt-service ratios to gauge the extent of the financial burden. To put debt-servicing ratios into perspective, a number of studies in the literature have used an 8% benchmark to denote a high debt burden; however, it should be noted that Baum and Schwartz (2006) concluded that an affordable debt-servicing-ratio should be based on income that takes into account family size6. To see this point, consider three situations: a single individual earning $25,000 annually, a family of 5 earning $25,000 annually, and a family of 3 earning $150,000 annually. In each of these three cases, applying the 8% benchmark denoting high debt burden would be very different. In the second case, it could be argued that no payments should be made while in the last case, 8% would not reflect a burden at all.

For the purpose of this report, family size was not taken into account and thus interpreting debt service ratios should bear this in mind. Finally, debt-servicing ratios were ranked in ascending order from which the debt ratio at the 25th percentile, the median, and finally the 75th percentile was determined.

A quarter of bachelor graduates with large government debt loads had debt-servicing ratios at or above 15%

Bachelor graduates with large debt loads at graduation – $25,000 or more – had the highest debt ratio at the 75th percentile, with 15%. That is, after theoretically repaying their government student debt, 85% of their gross earned income was left for all other debts, costs of living, and other related expenses. Similar proportions were found for college graduates with large government debt loads (14% ratio), master (13%) and finally, doctorate graduates (11%). Not surprisingly, at lower categories of debt, the debt ratios were substantially lower. For example, at the medium debt category – $10,000 to $24,999 – the debt service ratio at the 75th percentile was 9% at the college level, 10% at the bachelor level, 7% at the master and finally 7% at the doctorate level. It should be noted, though, that this could be expected: having similar gross earned income but being in a higher debt category would raise the distribution of debt service ratios.

Summary

Section three showed that a number of graduates not only took on debt during their studies but also had accumulated debt of $25,000 or more. Moreover, graduates with debt to both a government and non-government source had the highest average debt loads. A descriptive analysis comparing the Class of 2000 to the Class of 2005 revealed that the composition of debt had changed: graduates from the Class of 2005 with debt were more likely to have owed to non-government sources and less likely to have owed to government sources at graduation. The analysis also revealed that a number of graduates who had either paid off or were still paying their debt load two years after graduation had difficulties repaying the loans. Finally, the proportion of graduates that reported difficulties in their loan repayment increased with government debt size.


Notes

  1. For the majority of the text, it should be noted clearly that average debt refers to the particular graduate population that owed debt, as reported in the NGS.
  2. Represents difference in the average debt owed only to non-government sources, 2007 constant dollars
  3. Portraying the distribution across fields of study at the bachelor level and not the college, master, or doctorate level was arbitrarily chosen.
  4. Debt-Free refers to graduates that were no longer repaying their government student loans two years after graduation.
  5. As a note, the calculation of debt burden in this report may not actually indicate debt management per se. In some cases, minimum payments on outstanding debt constitute a high proportion of income. In other cases, individuals may pay more than the monthly payment or provide lump sums to pay down their debt faster.
  6. See Baum and Schwartz (2006) for a detailed discussion on the concept of debt-service ratios, debt manageability and historical rationale for the use of a benchmark.