Debt Aversion Among Students: Does It Exist and Is It Important?

Would the prospect of having to borrow to go to university dissuade someone from enrolling in an academic program that was attractive to them and that held the promise of earnings that were enough to repay the loan? That is, does debt aversion exist and does it affect high stakes decisions? What is generally meant by debt aversion is essentially that being in debt carries a psychic cost, apart from any of the explicit costs and risks associated with the loan.

Several recent studies look for debt aversion in the context of student loans.

The NYU Law School Experiment

Over time, rising law school tuition has led to average borrowing levels among graduating lawyers in the range of $70,000 to $80,000.  The law school at New York University (NYU) is well-known as a school that trains public-interest lawyers. Acknowledging the wide and rising gap in earnings between public-interest jobs  and private sector jobs, a number of law schools including the NYU law school,  have instituted loan repayment assistance programs (LRAP).  An LRAP pays off the loans of graduates who work in public-interest jobs The LRAP at NYU makes the loan payments for graduates who are working in public-interest jobs, essentially forgiving the loan for graduates who work in such jobs for ten years after graduating. In 1997, the NYU law school announced a variant of the LRAP called the Innovative Financial Aid Study (IFAS); for those eligible, IFAS would pay two-thirds of the tuition of students who took up public-interest jobs after graduation. If they still needed to borrow, their loans would be eligible for LRAP. Graduates who chose not work in public-interest jobs had to repay their own loans (under LRAP) or, under IFAS, have their tuition subsidy converted to a loan for which they were responsible.

Rather than selecting particular students to get the IFAS tuition subsidies, NYU decided to make IFAS the “treatment” in a randomized trial. To be eligible for IFAS, applicants to the NYU law school first had to agree to be part of the experiment. Among the volunteers, those randomly selected to be in the treatment group would be offered the IFAS tuition subsidy while those in the control group would be offered LRAP. The two programs were designed to have exactly the same net present value; that is, they were financially equivalent, taking into account all interest on the loans. The only difference was that the LRAP students had to take out larger upfront loans than the IFAS students, but they did so having been promised that NYU would pay off the loans if they worked in public-interest jobs. Only if borrowing carried a psychic cost, apart from any financial or risk-related considerations, would the enrollment rates of the IFAS applicants differ from the enrollment rates of the LRAP applicants. The result? Field (2009), who analyzed the data arising from the experiment, reports (Field, 2009, p.11)) that among applicants for the 1999 class, 42 percent of the applicants offered IFAS enrolled compared to only 32 percent of the LRAP applicants; among the 2000  applicants, the gap between the IFAS and LRAP applicants was even larger, 20 percentage points in favour of IFAS. These effects are as close as researchers have gotten to documenting educational debt aversion in high-stakes decisions.

The World Bank Survey

Caetano, Partinos and Palacios (2011) used the answers to questions on a World Bank survey to measure the existence of debt aversion.  All survey respondents were asked to choose between two methods of financing their postsecondary education.  The two methods were described differently but were in fact financially equivalent. The first method required a fixed monthly payment, except when income was low, in which case the payment would be a percentage of income. The second method required the repayment of a percentage of the respondent’s income except when income was high, in which case a fixed monthly payment would be required. With the appropriate choices of payment, these two methods are simply two different ways of presenting the same payment conditions. Caetano et al. assert that the first method will be understood as a loan and expect that debt aversion will imply a preference for that method.

The respondents were randomly divided into two halves. Both halves were presented with the same two methods. The first half was presented with the first method explicitly labelled as a “loan” and the second method explicitly labelled as a “human capital contract”.  The second half was presented with the same two options but without any explicit labels.

The results were clear (Caetano et al., 2011, p.22). The treatment group, whose choices were explicitly labelled “loan” and “human capital contract”, were about 13 percent points more likely to choose the human capital contract over the loan, even though both options were financially equivalent. Control group respondents, without the explicit labelling,  were less likely to choose the loan option, but only by about two percentage points.

Two Canadian Experiments

Two related Canadian laboratory experiments attempted to measure the existence and importance of educational loans (Eckel, Johnson and Montmarquette, 2007; Johnson and Montmarquette, 2010).  Participants were asked to make a large number of binary choice between cash, on the one hand, and various forms of loans and grant, on the other. In making these choices, they knew that at the end of the experiment, one of their choices would be randomly chosen to be honoured. For example, suppose one of the choices was between a $1000 loan and a $500 grant. The participants would have an incentive to choose the option they really preferred because they knew that their choice might actually be implemented, if it were the one chosen for them at the end of the experiment.

The exact choices offered to participants varied across the two experiments but were similar in that the grants and loan, if chosen, would be available only if the respondent enrolled in a full-time postsecondary program within two years. Respondent could decide not to accept the loan if they later decided they did not want to borrow.

One of the goals of the experiment was to measure the price sensitivity of the respondents.  The relevant prices could be manipulated by assuming that the “price” of the aid was the amount of  cash that would have to be given up if the aid were chosen. For example, the price of the $1000 grant mentioned above would be 50 cents per dollar of grant because, to get the $1000 grant, the respondent would have to given up the $500 in cash. The calculation for loan was a bit more complicated because the subsidy involved had to be calculated.  In the end, however, each choice involving a cash option had an implicit price associated with it and demand curves for different types of aid could be constructed by mapping the proportion accepting the financial against the calculated price.  One of the major findings in both experiments was that “once the price of educational subsidy is accounted for, demand for student financial aid was not much affected by the type of aid” (Johnson and Montmarquette, 2010, p. 39) That is, holding price constant, loans and grant were generally viewed by respondents as equivalent, suggesting that debt aversion was not very important.

The second goal was to see if debt averse respondents could be identified. In the second experiment, Johnson and Montmarquette defined as “debt averse” the relatively small group of respondents — just over 12 percent (152 of 1248) of the participants — who always chose a grant over cash and never chose a loan over cash. Such respondents were “…insensitive to price and complete sensitive to subsidy type” (Johnson and Montmarquette, 2010, p. 40).  When Johnson and Montmarquette incorporate the rich set of covariates that they collected from respondents into the analysis, they find that some traditional “at risk” groups — first generation students, members of First Nations — were unexpectedly less likely to be debt averse than others. That is, debt aversion was present but was not concentrated among the groups often thought be debt averse.

To summarize, debt aversion was found in the two experiments (Field, 2009; Caetano et al, 2011) that presented participants with choices that were financially equivalent.  It was also found in an experiment (Johnson and Montmarquette, 2010) where it was defined as present when respondent always chose grants but never chose loans when offered a choice between cash and the two forms of financial aid.

Implications for the Design of Student Aid Programs

What implications for student financial reform follow from the existence of debt aversion?

One idea is to translate the large subsidies that are attached to government loans into upfront grants. A cost-neutral version of such a plan is suggested by Gandhi (2008) and would presumably increase the access and persistence of debt averse students. The removal of the loan subsidies, however, might well create other problems for students once the repayment period starts. Without an in-school interest subsidy and with market rates of interest accumulating, many more students would fall behind on loan repayment. Given the difficulty of discharging student loans in bankruptcy — impossible in the US and difficult in Canada — some of those who borrowed (even with the new grants in place) would face severe hardship.

The finding by Caetano et al. that a key part of debt aversion in their study was the explicit labeling of loans suggests the possibility of presenting loans with language that does not explicitly use the words “loan” or ‘debt”.  That is, the psychic cost of educational debt might be easily reduced by a simple change in language.  For example, the Australian income-contingent loan program was initially called the Higher Education Contribution Scheme (HECS) and the use of the words “loan” and “debt” were not common in program descriptions.

Before rushing to change student financial aid programs, the Canadian finding that debt aversion is not concentrated among groups with lower than average enrolment and graduation rates should be seriously considered.  If debt aversion is randomly distributed across all students, is it less a problem?

Works Cited:

Caetano, G., , H. Patrinos, & M. Palacios. (2011). Measuring Aversion to Debt: An Experiment Among Student Loan Candidates. Policy Research Working Paper 5737. World Bank. Available at: http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-5737

Eckel, C., C. Johnson, C. Montmarquette, & C. Rojas (2007). Debt aversion and the demand for loans for postsecondary education. Public Finance Review 35(2), 233-262.

Field, E. (2009). Educational debt burden and career choice: Evidence from a financial aid experiment at NYU Law School. American Economic Journal: Applied Economics 1(1), 1-21.

Gandhi, S.J. (2008). Understanding Students from a Behavioral Economics Perspective: How Accelerating Student Loan Subsidies Generates More Bang for the Buck. Kansas Journal of Law and Public Policy 17(2), 130-167.

Johnson, C. & C. Montmarquette. (2011).  Loan Aversion Among Canadian High School Students. Scientific Series. CIRANO. Available at: http://www.cirano.qc.ca/pdf/publication/2011s-67.pdf

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Tuition Fees and Tax Credits: Are the Quebec Students Right?

(This piece was co-authored with Marc-André Gagnon)

The last round of negotiations between striking Québecois students and their provincial government broke off without any agreement at the end of May.

During the negotiations, the students proposed an interesting trade — they would agree to the elimination of Québec’s 20 percent provincial tuition tax credit in return for a two-year freeze on tuition. The elimination of the tax credit would raise the same revenue as the increase in tuition so the province would lose no money by agreeing.  While the students agreed to an increase in their tuition fees in the five years following the two-year freeze, they were counting on a victory by the Parti Quebecois in the next election and a continuation of the freeze after that.

The Québec Liberal Government refused the trade because, even if completely funded by the elimination of the tax credit, it was deemed politically indefensible. It is simply too complicated to explain to the general public how the tax-credits-for-tuition-fees swap would work and why the student proposal therefore made sense. Rather than agreeing to a trade that many mainstream economists would consider worthwhile, the Government balked at backing down to student groups that it views as unreasonably wanting better treatment when they are already treated very well.

Even acknowledging that the “printemps érable” has moved well beyond the nuts and bolts of student aid policy, perhaps the question of the usefulness of the tax credits should now be raised. The issue is simple: would the vast amounts now spent on education tax credits, both in Québec and in the rest of Canada, be better spent on other forms of student aid, perhaps including lower tuition fees?  The idea of trading education tax credits for other forms of student aid is far from new. For example, in the 2011 election, Michael Ignatieff proposed that grants given under his “Learning Passport” be funded in part by eliminating two of the federal education tax credits.

What are these tax credits anyway?

If a government wants to provide money to students, it can do so either by giving them money upfront in the form of grants or subsidized loans or by allowing them to pay lower taxes as a result of their student status.   In Canada, the Canada Student Loan Program (CSLP) provided about $600 million in upfront grants and about $2.2 billion in upfront subsidized student loans in 2009-2010.

In addition, each full-time student is eligible for several different federal tax credits. Here’s how they work. Each student accumulates an “amount” specified by the legislation underlying each tax credit.  The federal tax credit itself then consists of 15 percent of the accumulated total, though Quebecers effectively receive a somewhat smaller percentage because the federal credits interact with the Québec tax abatement that resulted from a long-ago transfer of tax points to Quebec from the federal government . There are three such “amounts” for current students: the education amount, tuition and fees and textbooks.  As an example, a full-time student at an Ontario university is able to use the credits to reduce their taxes by roughly $1,600. Alternatively, they can transfer the credit to their parents or grandparents or they can carry it forward for use in a future tax year. Each province makes additional tax credits available.   Quebec’s tuition tax credit allows full-time students, paying $2,168 in tuition, to reduce their taxes by $434.

Of course, because of the existence of these tax credits, the government collects less tax revenue than it would if the credits did not exist.

According to federal Department of Finance projections for 2011, the above three federal tax credits cost the government about $1.6 billion in lost revenue in 2011. The Ministere des Finances in Québec projects losing $137 million in tax revenue because of the Quebec tuition tax credit.

This brings us back to the “trade” suggested by the Québec students. Essentially they were suggesting giving up the 20 percent Quebec tax credit and using the resultant increase in tax revenues to take the place of the money that would be raised by the first two years of the proposed tuition increase. This is similar to the idea, regularly proposed by the Canadian Federation of Students, to eliminate the federal tax credit programs and use the resulting increases in tax revenues to convert $1.6 billion in CSLP loans into student grants.

While the proposed Québec trade was cost neutral, what about the overall desirability of the trade? Most analysts agree that the tax credits are poorly understood, incompletely utilized and likely to have almost no impact on student decisions about whether or not to enrol in university or college. If so, the underlying rationale for their existence is questionable. To put it bluntly, does anyone seriously believe that teenagers and their families choose post-secondary education over the alternative because of the incremental value of these tax credits?  If their purpose is to encourage access and persistence in post-secondary education, then they should be traded for policies that do a better job. Whatever you think about the turmoil in Québec, the students are right on this issue.

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Paul Slovic on “Psychic Numbing”

The power of fiction is to create empathy …  A newspaper could tell you that one hundred people, say, in an airplane, or in Israel, or in Iraq, have died today. And you can think to yourself, “How very sad,” then turn the page and see how the Wildcats fared. But a novel could take just one of those hundred lives and show you exactly how it felt to be that person… You could taste that person’s breakfast, and love her family, and sort through her worries as your own, and know that a death in that household will be the end of the only life that someone will ever have. As important as yours. As important as mine. – Barbara Kingsolver [1]

Paul Slovic has written about “psychic numbing” as a possible answer to the question “Why do good people ignore mass murder and genocide?”[2]  Acknowledging that the answer to this question is unlikely to be straightforward, Slovic (p.80) focuses on one particular aspect of the answer, “… that the statistics of mass murder or genocide, no matter how large the numbers, fail to convey the true meaning of such atrocities. The numbers fail to spark emotion or feeling and thus fail to motivate action. Genocide in Darfur is real, but we do not “feel” that reality.”

His argument is rooted in the now common idea that humans have two systems of thinking, one intuitive and automatic, and the other slow and contemplative. The same idea is the subject of Daniel Kahneman’s recent Thinking, Fast and Slow.[3]  The slow and contemplative System 2 likely values every life more or less equally. Should we not feel just as unhappy we hear that one person has died in Syria as we do when we hear that the death toll there has risen from 2,000 to 2,001?  We don’t, of course, and Slovic locates one reason in the fast and intuitive System 1. System 1, he argues, evolved to deal with immediate “present, visible, immediate dangers” not “distant, mass murder.” We can feel the reality of an immediate danger or an immediate personal tragedy but we have enormous difficulty feeling the danger or the tragedy of large-scale events. We cannot feel 100 times worse when 100 people die than we do when one dies. Several kinds of “psychic numbing” has now been documented in a number of experiments that Slovic marshals on behalf of his argument.

What is to be done? Images and narrative enlist our emotions far more effectively than do statistics documenting the large scale of any disaster. Charitable organizations have long tried to focus our attention on one hungry child, even when the child is one of many at risk. Reading Barbara Kingsolver’s novel The Poisonwood Bible (or, better yet, listening to Kingsolver herself read the text in the audiobook version) will give you a far better sense of what happened in the Congo in the early 1960s than any history. And, as the quote that begins this piece illustrates, she is well aware of what she is trying to do.

Beyond art, however, Slovic (pp. 91-92) believes that:

 … we cannot depend only upon our moral feelings to motivate us to take proper actions against genocide. That places the burden of response squarely upon the shoulders of moral argument and international law. The genocide convention was supposed to meet this need, but it has not been effective. It is time to reexamine this failure in light of the psychological deficiencies described here and design legal and institutional mechanisms that will enforce proper response to genocide and other crimes against humanity.

 


[1] Barbara Kingsolver, High Tide in Tucson, (Harper Perennial, 1996) 231, cited in Slovic (200), p. 87.

[2] Paul Slovic, “ ‘If I look at the mass, I will never act’: Psychic numbing and genocide” (2007) 2(2)  Judgment and Decision Making 79. Available at http://journal.sjdm.org/jdm7303a.pdf.

[3] Daniel Kahneman, Thinking Fast and Slow (Farrar, Strauss and Giroux, 2011)

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Trends in Income Inequality in Québec

In the previous post, we saw that poverty levels in Québec, as measured by the Market Basket Measure (MBM) fell relative to Ontario (and Canada as a whole) from 2000-2009. What has happened to the level of income inequality?  First, however, it is always worth remembering — not that the Fraser Institute would ever let us forget — that poverty and income inequality are not the same. Over time, the incomes of the poorest people could rise substantially and income inequality rise at the same time if the incomes of the higher-income people rise more than the incomes of the poor. An absolute measure of poverty, like the MBM, would show a decline in poverty accompanying an increase in income inequality.

The most commonly used measure of income inequality is the Gini coefficient, a number that ranges between 0 (indicating that all families have the same income) and 1 (indicating that one family has everything and all others nothing).[1]

As Fortin et al. (2012) emphasize in their excellent review of trends in Canadian income inequality, it is important to distinguish trends in market income — income measured before taxes and transfer are taken into account — and disposable income — income measured after taxes and transfers are included.[2] Fortin et al. go back to 1980 in their discussion of inequality and note (p. 3) “that there is no doubt that market income inequality has risen in Canada in the last three decades.” But policies that affect the progressivity of the tax system and the generosity of social assistance programs can limit the extent to which increasing inequality in market income is translated into increasing inequality in disposable income.  What seems to have happened in Canada is that, until the mid-1990s, those policies kept inequality in disposable income from rising along with inequality in market income; then, when some governments moved to limit social assistance and to reduce taxes, inequality in disposable income grew.

The Table below shows Gini coefficients for Québec, Ontario and Canada for the period 1990 to 2009. The first three columns show the distribution of market income while the second three columns show the distribution of disposable income. Throughout this period, Québec had a more unequal distribution of market income than either Ontario or Canada as a whole. All three experienced growing inequality in the 1990s and a level of inequality that remained constant at the new higher level in the 2000s. However, the Québec tax and transfer system consistently did more to reduce the inequality than the corresponding systems in Ontario or Canada.  In any year, this can be seen by comparing the Gini coefficient for market income to the Gini for market disposable income. In most years, Québec had a more unequal distribution of market income but a more equal distribution of disposable income.

Fortin et al. discuss and summarize the evidence concerning a number of different explanations for the Canada-wide patterns in the distribution of market income. One is technological change in how goods and services are produced, changes that have increased the rate of return to education (driving up the income gaps between those with and without advanced education) and led to a polarization of the earnings distribution “with fewer jobs paying a ‘middle class wage’ and greater employment at the top and bottom of the distribution” (p.12). Minimum wages and rates of unionization are another potential explanation for changes in the distribution of market income because of their impact on the wages earned by those in the lower part of the income distribution.[3] Studies examining these factors, or others, have not been undertaken on the provincial level.

To summarize then, the distribution of market income in Québec is more unequal than in Ontario or in Canada as a whole. However, the effects of the tax and transfer system in Québec combine to make the distribution of disposable income less unequal than in Ontario or in Canada as a whole.

———————

Trends in Market and Disposable Income Inequality, 1990-2009

All Family Units

Inequality in Market Income (Before-tax, Before-transfer)

Inequality in Disposable Income (After-tax, After-transfer)

(1)

(2)

(3)

(4)

(5)

(6)

Gini Coefficient

Québec

Ontario

Canada

Québec

Ontario

Canada

1990

0.415

0.379

0.403

0.269

0.280

0.286

1991

0.436

0.409

0.422

0.278

0.291

0.292

1992

0.433

0.414

0.429

0.270

0.287

0.291

1993

0.443

0.421

0.429

0.274

0.291

0.289

1994

0.448

0.426

0.432

0.278

0.292

0.290

1995

0.446

0.423

0.430

0.280

0.294

0.293

1996

0.454

0.434

0.439

0.290

0.305

0.301

1997

0.454

0.431

0.438

0.290

0.305

0.304

1998

0.462

0.437

0.446

0.295

0.311

0.311

1999

0.441

0.435

0.437

0.284

0.318

0.310

2000

0.443

0.437

0.439

0.294

0.325

0.317

2001

0.450

0.434

0.440

0.298

0.321

0.318

2002

0.448

0.430

0.439

0.301

0.320

0.318

2003

0.442

0.432

0.437

0.295

0.321

0.316

2004

0.445

0.444

0.442

0.299

0.332

0.322

2005

0.442

0.430

0.435

0.296

0.321

0.317

2006

0.443

0.430

0.436

0.294

0.321

0.318

2007

0.444

0.431

0.435

0.292

0.319

0.316

2008

0.448

0.438

0.439

0.299

0.323

0.321

2009

0.442

0.447

0.445

0.289

0.324

0.320

Source: CANSIM Table 202-0709. Available at http://cansim2.statcan.ca/cgi-win/cnsmcgi.pgm?Lang=E&ResultTemplate=OLC&CORTyp=2&CIITpl=CII___&CORCMD=GetTRel&CORId=75F0011X&CORRel=4

[1] Sources that describe the Gini coefficient, explain how it is calculated and point out its strengths and weaknesses are easy to find.  See, for example, http://adarnay.wordpress.com/2010/04/27/the-gini-coefficient-but-dont-run/. The World Bank has a more complete but still accessible discussion of measuring inequality at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTPA/0,,contentMDK:20238991~menuPK:492138~pagePK:148956~piPK:216618~theSitePK:430367,00.html.

[2] Fortin, N., Green, D, Lemieux, T., Milligan, K. & Riddell, C. (2012). “Canadian Inequality: Recent Developments and Policy Options.” Canadian Labour Market and Skills Researcher Network, Working Paper #100. Available at http://www.clsrn.econ.ubc.ca/workingpapers/CLSRN%20Working%20Paper%20no.%20100%20-%20Abstract.pdf

[3] For a discussion of the evolution of market and dispoable income in Québec through 2004, see Stéphane Crespo’s analysis at http://www.stat.gouv.qc.ca/publications/conditions/pdf2007/InegaliteRevenu.pdf.

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What Happened to Québec Poverty Rates, 2000-2009?

What has happened to the level of income inequality and to the incidence of poverty in Québec, relative to Ontario and to Canada as a whole, in the past 10-15 years?

Overall, the answer seems to be that income inequality has gone down, as has the proportion of Québecers living in poverty.

Sentences like that one demand immediate qualification. First, even if inequality and poverty measures have improved, that does not mean that we can turn our attention elsewhere because inequality and poverty are no longer problems. Second, poverty and inequality can be measured in many different ways and not all measures move in the same way at the same time.

Poverty measures come in two flavours, absolute and relative. Absolute measures try to define the cost of the necessities of life such as food, shelter and clothing; those who do not have enough income to buy the necessities are then classified as poor. Human Resources and Skills Development Canada (HRSDC) has developed an absolute measure called the Market Basket Measure (MBM).  Relative measures define poverty in relation to the incomes of other people. Even those who have more than life’s necessities — for example, cellphones and cable TV —  will be classified as poor if their income is far below that of other people. One commonly-used relative measure is called the Low Income Measure (LIM),  defined simply as 50 percent  of median income, adjusted for family size. Statistics Canada’s Low Income Cut-Off (LICO) defines as poor those who spend more than 63% of their after-tax income on food, shelter and clothing.[1]

After providing a clear and concise discussion of the poverty measures available in Canada, the Centre d’étude sur la pauvreté et l’exclusion (CEPE) recommended in 2009 that the Québec government use HRSDC’s Market Basket Measure as the primary indicator of poverty.[2]

From 2000 to 2009, the proportion of all persons living in poverty, as defined by the MBM, fell in Québec (see the Table below).  Measured at 11.6 percent in 2000, the percentage of all persons whose income was below the MBM fell steadily to 8.4 percent in 2004, before rising to 9.5 percent in 2009. In Ontario, the poverty rate, as measured by the MBM, started below Québec in 2000 (9.9 percent versus 11.6 percent) but, by 2008, was effectively the same (9.4 percent versus 9.5 percent).

Ontario’s LICO poverty rate is consistently lower than Québec’s (with the exception of 2009), largely because the LICO does not account for the very different housing prices — lower in Québec, higher in Ontario and British Columbia — across Canada.  One of the reasons that CEPE recommended using the MBM was precisely because it better reflected the different prices of food, shelter and clothing prevailing in different parts of Canada.[3]  But CEPE (p.33) added the caveat that the MBM was to be preferred “as long as its content is periodically reviewed in order to reflect changes in society”.  If the MBM fails to impartially and accurately measure actual costs, then its usefulness will be seriously undermined. Michael Goldberg, Steve Kerstetter and Seth Klein recently wrote that the federal government has changed the method of calculating costs in a way that “no longer passe[s] the test of common sense”, reducing the cost of shelter to levels that were inconsistent with casual observation.[4] If so, then the MBM — or at least the HRSDC version of it — will lose a good part of its appeal.

Measured either by MBM or by LICO-AT, it seems that the incidence of poverty has fallen in Québec since 2000 … more than it fell in Ontario or in Canada as a whole. Next, income inequality.

———–

Poverty Levels in Québec , Ontario and Canada, 2000-2009

All Persons HRSDC Market Basket Measure  (MBM-2008)

Low Income Cut-Off (LICO_AT)

Québec

Ontario

Canada

Québec

Ontario

Canada

2000

11.6

9.9

11.9

14.8

10.8

12.5

2001

11.5

9.2

11.0

13.8

9.3

11.2

2002

10.3

9.7

10.9

12.3

10.7

11.6

2003

9.2

9.5

10.6

12.3

10.4

11.6

2004

8.4

10.5

10.6

11.5

11.0

11.4

2005

8.9

10.1

10.2

11.7

10.3

10.8

2006

9.0

10.0

10.0

11.5

10.3

10.5

2007

8.2

8.7

8.8

10.7

8.8

9.2

2008

9.5

9.4

9.5

11.2

9.3

9.4

2009

9.5

10.5

10.6

9.4

10.1

9.6

Source: Statistics Canada, “Income in Canada, 2009”. IVT Version available from http://www5.statcan.gc.ca/access_acces/alternative_alternatif.action?l=eng&loc=t/804.ivt

Notes:

[1] A more detailed comparison of the various poverty thresholds appears in Xuelin Zhang, Low Income Measurement in Canada: What Do Different Lines and Indexes Tell Us. (2010). Statistics Canada. Income Research Paper Series.  Available at http://www5.statcan.gc.ca/bsolc/olc-cel/olc-cel?catno=75f0002m&lang=eng.

[2] Centre d’étude sur la pauvreté et l’exclusion, “Taking the Measure of Poverty: Proposed Indicators of Poverty, Inequality and Exclusion to Measure Progress in Québec” (2009), pp. 24-34. Available at http://www.cepe.gouv.qc.ca/publications/pdf/Avis_CEPE_en.pdf.

[3] Ibid., pp. 32-33

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Sexually-transmitted debt

People who live on low incomes frequently have debts. On the one hand, this is hardly surprising — few among the poor have savings available for “rainy days”.  If the car breaks down or the furnace stops working, borrowing may be the only way to fix the problem. On the other hand, credit is far less available to people on low income because of their limited ability to repay loans.  That said, people regularly move into and out of poverty, so the poor often carry debts that were incurred when their income was higher.

While the debts of the poor vary in size and source, one particularly salient form of debt is called “sexually transmitted debt” (or, far less colourfully, “relationship debt”).  Bob Klotz, a Toronto lawyer who is an expert on the topic, cites a  definition that appears in a 1994 report by the Australian Law Reform Commission, a definition that seems to repeat one from an earlier Australian conference paper:[1]

 … the transfer of responsibility for a debt incurred by a party to his/her partner in circumstances in which the fact of the relationship, as distinct from an appreciation of the reality of the responsibility for the debt, is the predominant factor in the partner accepting liability.

Much of the legal discussion of sexually-transmitted debts (STD) deals with those who guarantee loans taken by their partners for business purposes.  For the poor, as documented in a qualitative study in the United Kingdom, it is credit cards that more often generate problems.[2]  If one partner is unable to get a card, the other partner has difficulty resisting the request to “simply” add his or her partner as a secondary cardholder.

As Klotz (and others) have pointed out, the law must balance two conflicting points of view in dealing with sexually-transmitted debt.[3]  The “public” face of the law tends to treat individuals, male or female, as fully rational, fully capable and fully aware of the responsibilities they take on. In the “private” sphere, however, women are much more likely to face physical and emotional abuse and to be financially dependent on their partners. Those who find themselves in this situation are likely to agree to joint responsibility for debts, judging the risks of not agreeing to their partners’ demands to be greater than the risks of later being held liable for the debts.

Another common form of debt among the poor arise when people fall behind in rent or utility payments. More about that later.


[1] Klotz, R.A. 2008. “Sexually-Transmitted Debt”. Paper presented at the National Family Law Conference. Deerhurst, Ontario in July 2008. Retrieved from http://www.divorcemate.com/library/FLC%20Sexually%20Transmitted%20Debts.pdf. The report from the Australian Law Reform Commission can be found at http://www.austlii.edu.au/au/other/alrc/publications/reports/69part2/#Contents and the citation to the conference paper appears at Note 1176.

[2] Dearden, C., J. Goode, G. Whitfield, & L. Cox. 2010. “Credit and debt in low-income families.” Joseph Rountree Foundation. Retrieved from http://www.jrf.org.uk/publications/credit-debt-low-incomes-families

[3] Klotz, op. cit, p. 5. See also Kaye, M. 1997. “Equity’s treatment of sexually transmitted debt”.  Feminist Legal Studies Vol. 5, No. 1, pp. 35–55.

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PSE: Affordable for Whom

This past December, I worked with Sandy Baum, a long-time friend and co-author, on revising a paper we had originally written in 2010 on “affordability” in post-secondary education (PSE). The quotes surround “affordability” because the word is often used without much effort to define what it means. One particularly troublesome issue for us has been the question of “affordable for whom?”

Economists are quite clear on this. Those making the decision are the potential students and they will choose to go to school if the present value of their expected future earnings (and other non-quantifiable benefits) exceeds the present value of the costs, including the earnings foregone by going to school. As long as that benefit-cost calculation is more favourable than any other option, and as long as the potential students can borrow enough, at low enough interest rates, to pay the out-of-pocket costs, they are on their way to class. Income-contingent student loans — borrowed by students to pay for PSE and then repaid after leaving school, with the size of the monthly payments depending on their post-school earnings — would either break or greatly weaken any link between parental income and the students’ ability to pay for PSE. Family income remains relevant, but only because some potential students can count on getting what amount to non-repayable grants from their parents and others cannot.  As long as student loans are widely available, using the word “affordable” for PSE is not really appropriate and “worthy of the investment” really is.

Parents are far less clear on the issue than are economists. For many parents, paying for the education of their children is an obligation no different than paying for their food and clothing as they are growing up.  Perhaps the children will be the ones to decide if and when to go to college or university, but the familial assumption is that the parents will pay. Not all parents feel this way, of course.  Some are willing to pay part of the costs while expecting their children to pay the rest, either by borrowing or by working while in school. Still others feel no obligation and expect their children to make their own way.

To the extent that parents feel at least a partial obligation to pay for PSE, the question becomes whether the parents have enough savings to pay the out-of-pocket costs of PSE or whether the parents can borrow enough to pay the costs and then have the ability to make the required monthly repayments.  Post-secondary education is a gift given freely by parents to children as an expression of both love and obligation.  Is this gift affordable? For some, it will mean giving up other expenditures  — cars, vacations, home renovations — that they dearly want but might not need. For others, the gift will cut into necessities such as food, shelter and clothing and would be unaffordable in the same way that housing is unaffordable if not enough is left over, after paying for it, to maintain a basic level of non-housing expenditures.

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