Student Loan Crisis and Predatory Bankruptcy

A recent report by the Canadian Federation of Students identifies a link between the defunding and deregulation of post-secondary education and the reduction in the living standards of students. These were cemented by changes to bankruptcy law that restricted their access to protection or discharge.

Despite how the crisis is usually portrayed in the press, this appears not to just be a case of the government failing to protect students from creditors and universities. Rather it is also a case of the government empowering those institutions over the students. The current crisis is the result of government cementing the dangers of under-funding and price deregulation by implementing bankruptcy laws designed to limit blow back for creditors by restricting protections on student borrowers.

In our current economy, post-secondary education is effectively a requirement for the labour market. Yet, the government has failed to regulate and fund this system to support that requirement. This placed an undue burden on students. The report says “while the demand for education has increased, public funding has failed to keep up.” This has resulted in a “growth of costs that have been downloaded onto individual students, namely in the form of high tuition fees.” The report says that since 1990, national average tuition fees have seen an inflation-adjusted increase of over 155%.

Statistics Canada says:

The increases have been particularly large in professional programs (i.e., medicine, dentistry, and law)….These overall increases at the national level were largely driven by trends observed in Ontario, where tuition fees in professional programs were deregulated in 1998…Other provinces had already deregulated fees or had experimented with deregulation to varying degrees.

This deregulation causes an obvious problem for students as it makes funding their schooling much more difficult, thereby forcing them to take on high levels of debt. Students with Canada Student Loans currently graduate with an average debt of over $28,000, which would take a middle-income family earning $42,600 after-tax 195 days to pay off, more than half a year’s salary.

This debt creates a situation in which young people with student loans are in a position of financial disadvantage. The report notes that “Statistics Canada found that if student loan borrowers and non-borrowers with similar average total debts were compared, non-borrowers had significantly higher levels of net-worth and assets.” Meanwhile, “Paying back a large amount of student-debt does not increase personal wealth or stimulate the broader Canadian economy in any way; it only serves to have an increasing number of young Canadians at a disadvantage when compared to previous generations and their peers who had the financial means to pay for the education up-front.”

Recent estimates by the Confederation of Students has put Canada’s total student debt around $15 billion. Both Union and Government experts admit this is the result of the defunding and deregulation of post-secondary education, which allowed tuition rates to balloon and forced students to rely on fairly high interest loans to pay for their education, which unsurprisingly lead to fewer students being able to pay back their debt.

Instead of working to fix the loan system to protect students and creditors our government has elected to only protect creditors, by cementing the student debt through changes to bankruptcy law.

Our government’s response to the inability of the borrowers to pay their bills has not just been wholly inadequate, rather it has been actively detrimental and cemented the power of the creditors over the borrowers. After creating much of this problem through defunding and deregulating post-secondary education, the government then compounded this damage by modifying the bankruptcy law to prevent students from discharging loans for up to 7 years.

A parliamentary report on the change explicitly states that:

This change in the status of student loan debt was intended to alleviate the impact of the loss of preferred creditor status for debts owed to the Crown in the face of: mounting numbers of loan defaults; increasing loan losses; and perceptions that students were abusing the bankruptcy process to rid themselves of their loan obligations…while the main motivation for the policy of requiring student loans to survive bankruptcy in all of these countries was a perception that students were using bankruptcy casually to avoid repaying their loans, the factual record to support this perception was thin to non-existent.

Yet, despite this lack of evidence, the law remains in place, protecting the ‘preferred creditor,’ while making life much harder for students, with the only justification ostensibly being that the creditors financial well being is more important.

As the government continues to protect creditors over students, tuition rates, interest and debt continue to increase.  Students are still not allowed to use the same methods afforded to other borrowers to protect themselves from lenders. For this reason, the rapid reduction of the living standard of those with severe student debt will continue.

Mitchell Thompson is a journalism student at Ryerson University and a contributor at Disinfo. Read other articles by Mitchell.