US student debt levels could cause next recession

Canadian student loan debt soars, but situation grim south of the border

By Patrick Vaillancourt, News Editor

While a post-secondary education in Canada has become increasingly expensive, the level of student debt in the United States is quickly reaching heights that could have catastrophic effects on the global economy.

Statistics Canada’s recent Survey of Financial Security revealed that student debt levels in Canada rose almost 25 per cent between 2005 and 2012, with approximately $28.3-billion owed in student debt in 2012.

The picture is much grimmer south of the border, with student debt levels rising a whopping 110 per cent between 2005 and 2012, representing over $1-trillion in outstanding student-related debt.

That figure is so large that American economists are worried that US student debt could be the cause of the next financial crisis that cripples the American economy. Lessons of the 2008 financial meltdown demonstrate that a vulnerable American economy could have devastating effects on the entire global financial system.

The crippling debt American students are piling up hinders their buying power and their ability to contribute to the economy. A typical American financing their education with loans and other scholarships are often unable to spend time out at restaurants and generally do not have the purchasing power to buy a vehicle, creating an entire class of citizens pinching pennies as opposed to fuelling the economy.

In Canada, the picture is slightly brighter, but economists are quick to highlight that the cost of a post-secondary education has almost tripled since 1990, and it won’t be dropping any time soon. The Canadian Centre for Policy Alternatives projects that the cost of a post-secondary education will rise another 13 per cent by 2017.

Students carrying the burden of student debt now should also heed notice from the Bank of Canada regarding interest rates. The central bank has been toying with the idea of raising interest rates in the near future, which could hit indebted Canadians quite hard.

At present, tuition rates are lowest in Newfoundland and Labrador, with the average annual fees of just under $2,800. Ontario remains the most expensive for a post-secondary education at just over $7,000 per year.

The average Canadian student post-secondary debt after graduation is approximately $26,000, which student unions across Canada are trying to reduce through better government funding options and forgivable loan programs.

In the United States, there are over 40-million student loan borrowers and seven million of them are currently in default. Making matters worse, most American employers run credit checks on applicants, meaning that those unable to keep up with student loan payments may be considered unemployable by reputable companies with generous compensation packages.

According to Kyle McCarthy, the co-founder of StudentDebtCrisis.org, the US government goes to extreme measures to ensure that borrowers are compelled to repay their student loans on schedule. In an interview with the Other Press, McCarthy said that the federal government acts much like “a bully” in their treatment of American student loan borrowers.

“There are cases where the Department of Education has encouraged some colleges to withhold a student’s transcript if they were behind on [student] loan payments,” said McCarthy. “How can a recent graduate apply for a decent job to pay down his or her student debt if the employer can’t even verify the applicant’s credentials?”

McCarthy also noted that the American government, much like here in Canada, is earning interest income from student loan interest rates. According to McCarthy, students gave the US treasury over $50-million in interest from student loans in 2013.

Piling student debt, coupled with the disadvantages placed on American job-seekers and recent graduates who may fall behind on loan payments, could have the potential to create another economic calamity, according to economists.