Solving The Problem of Higher Education
economics,  student loans

Solving The Problem of Higher Education

Defining the Problem

When I reflect on the subject of rising tuition costs and student loan debt in Canada, I’m struck by its parallels with the events that led to the U.S. housing crisis:

  • Easy credit backstopped by the federal government allowed individuals who had no business in purchasing a home (i.e., inadequate down payment or household income) to do so. In the absence of government-guaranteed mortgages, banks would never have lent money to many home buyers were it not for an agency such as the Federal Housing Administration guaranteeing repayment in the event of default.
  • As a result of easy access to credit, there was a huge demand for housing in the U.S. which created real estate inflation, culminating in the housing bubble that started to unravel in 2006 and led to the 2008 financial crisis and current global recession.

At this point, you may be asking what the U.S. housing crisis has to do with the issue of student loan debt and rising tuition costs in Canada. Well, the parallels are quite similar:

  • Easy access to government-guaranteed student loans has allowed accessibility to secondary education. This is ostensibly a good thing. However, in the absence of a government guarantee of repayment (i.e., the bank takes the full risk of non-repayment by the borrower), it is highly doubtful that a bank would risk financing a student’s education in say, the Arts and Humanities. Banks want to be repaid, and the job prospects of graduates in such areas of study are, frankly speaking, less than concrete.
  • The current problem is that there are many students majoring in such subjects areas with easy access to credit; credit that wouldn’t have existed were it not for the Canada Student Loan Program and attendant provincial student loan programs. This has created tuition inflation, in much the same way government-guaranteed mortgages in the U.S. created housing inflation.
  • Tuition inflation in turn creates higher amounts of student loan debt, leaving our society with a generation of indentured graduates facing a lifetime of student loan repayment. This will have a ripple effect on our economy for years to come because they will have less disposable income to spend on such life milestones as a home or vehicle purchase.

So, back to the title of this article: how can we solve the problem of higher education?

Deflating the Tuition Bubble

Serious consideration should be given to the prospect of eliminating the Canada Student Loan Program and provincial student loan programs. Therefore, if a private sector bank takes the full risk of lending to a student, it will assess her employment and repayments prospects more carefully.

Like anything else, the price of education is a function of supply and demand. Consequently, tuition would eventually decrease due to a lack of accessibility to easy student loan money. For example, it may be easier for a medical or engineering student to get a loan than say, a liberal arts major.

Implementing this however, would create another problem: how would a gifted student of modest financial means gain access to higher education if she is unable to obtain credit to finance it? A bank may be understandably wary of lending to someone who lacks work experience, assets, or a qualified co-signer, regardless of her future prospects.

An obvious route would be to apply for a university scholarship. However, scholarships are often funded by private endowments, which have decreased significantly due to the current recession. Consequently, a shrinking pool of scholarships has made access to higher education even more challenging.

Learning from India

A possible solution to this problem is to model a national education system based on the Indian Institutes of Technology (IITs). The IITs were conceived by Prime Minister Jawaharlal Nehru in reaction to the British colonial experience. Nehru believed that India was more likely to remain a self-sufficient nation if it made itself technologically equal to its former rulers.

With that objective in mind, he created a ruthlessly efficient system for finding and nurturing Indian technical talent in engineering and other technology-oriented subjects. Applicants to IIT undergraduate programs are required to take a national entrance examination called the Joint Entrance Examination. The exam is comprised of sections on mathematics, physics, and chemistry. The examination is merit-based and rigorous, resulting in a very low admission rate (about 1 in 50 in 2011).

Our world is changing rapidly and that change is being driven by technology. Therefore, finding and developing young talent (irrespective of their financial means) in fields such as science, technology, engineering and physics (the “STEP” majors) should be a national priority. Therefore, here is what I propose:

  • Establish Canadian versions of IITs across the country (let’s call them “CITs”) focusing on STEP-oriented undergraduate programs. In designing the programs, the CITs would consult with industry in determining what skills are needed.
  • Acceptance to CITs would be based on a national entrance examination, comprising of STEP-related subjects.
  • The costs of education for successful applicants would be fully financed by the federal government, as finding and training STEP talent is an issue of national priority.

Ideally, the end result would be a pool of highly skilled graduates who can do the technologically demanding jobs of today and create the technological industries of tomorrow.

© Copyright Victor Fong, 2012.

Victor is the President of Fong and Partners Inc. He is a Licensed Insolvency Trustee and Chartered Professional Accountant. With over 20 years of experience in the insolvency field, Victor has been involved in both corporate and consumer insolvency engagements. Previously with a large national firm, Victor founded Fong and Partners Inc. in 2007 so that he could dedicate his professional life to help people from all walks of life to deal with their debt.