Study area a debt factor
It’s a well-established fact that students are emerging from post-secondary education with more debt than ever before. Given increased competition over fewer jobs, combined with the rising cost of higher education, it’s hardly surprising that many students are defaulting on their loans post-graduation.
However, according to a recent study, increased probability of defaulting on government loans may have more to do with field of study than income.
“Liberal arts graduates were much more likely to default than graduates of engineering and applied programs such as business and computer science. But even when we controlled for earnings those differences still remained,” said David Walters, a professor at the University of Guelph and one of three co-authors on the study. “So, in other words, the default levels are less to do with earnings and something to do specifically with the characteristics of the programs.”
The research was done in conjunction with Laura Wright, currently a PhD candidate at Western University, and Nippissing University professor David Zarifa.
The study made use of information from the Statistics Canada National Graduates Survey, which polls a body of approximately 40, 000 graduates every two years. Only information from university undergraduates and college undergraduates was used.
Walters clarified that “both level and field matter” in terms of debt defaulting, meaning that programs and type of post-secondary education have an impact. Although the study was not able to isolate particular reasoning for why liberal arts graduates tend to default at higher rates both at the college and university level, Walters has some theories.
“We think it has to do with skills they’re obtaining in their programs. So, for example, graduates of business programs in particular, they’re more likely to take courses involving numeracy or courses where they deal with finances,” he speculated. “They’ve learned skills in school that could help them navigate through their own debt.”
Inexperience in dealing with personal finances may also be contributing to the problem.
“Most of these students, you know, when they come to university, they haven’t even had a credit card. So the concept of debt and debt management is completely foreign to them,” said Walters.
Jeannine Mitchell is a financial writer and founder of the Student Finance 101 website and society, which offers resources to aid student financial literacy. She believes that there are socioeconomic issues the study has neglected to reflect in its theories.
“It looks at the income of the students, but it doesn’t look at family income and this is a huge issue,” she asserted. Mitchell also acknowledged that this could impact discrepancies between college and university default statistics.
“Colleges draw a higher proportion of lower income students who lack family financial support. Having the same starting salary in these cases does not mean having the same ability to pay off debt,” she explained.
“This kind of family support could easily … have skewed the study’s statistics by showing a lower rate of default that has nothing to do with universities versus college, nothing to do with choice of program or student characteristics.”
Walters and co-researchers found that the amount of students defaulting on their loans was far fewer than the figures found in the media, with their numbers suggesting between two and ten per cent default rates. After careful consideration, the discrepancy was found to be the result of including or excluding drop-outs in calculations of loan defaults.
“Those results in comparison show that at least getting your credential, your degree or diploma, does wonders in terms of your ability to not default,” Walter said.
The implications of student loan defaults should not be underestimated, according to Walter. “Defaulting on your student loan can have serious implications in terms of your credit rating,” he said. “Many of them [students] are aware of it, but it’s a backseat issue in their minds.”
Mitchell added, “They don’t really understand how harshly the government will claw back dollars from them … It leads to nightmares of collection agents and legal hassles, just very stressful.”
Walter expressed that universities and student loan centers need to do more to help educate students on dealing with debt, as well as increasing awareness of the services that are available to assist with debt repayment after graduation.