Be Careful What You Wish For

April 20, 2007

Alex Usher, Vice President, Educational Policy Institute

Public Policy is complicated. Really complicated. So complicated that when some well-meaning folk tries to make things better, they frequently end up hurting the very people they wish to help.

The following story is God’s Honest Truth. I really wish it weren’t. It doesn’t paint politicians from my country in a very flattering light. But it’s what almost inevitably happens when you try to buy votes with tuition policy.

Here’s the scoop: in its April 10 budget, the Government of Prince Edward Island made a surprise announcement to reduce tuition fees at UPEI by 10 percent, or a little under $500/year. In theory, the move makes university education more affordable, and hence more accessible, especially for youth from lower-income backgrounds.

It’s always nice when a Government has its heart in the right place. But hold the applause: while many students will benefit from this policy, several hundred students will actually be poorer after the tuition cut than they were before. Worse, those who will be worse off are precisely those the cut is designed to help: students with large student loan burdens.

To see how this will happen, let’s compare how the tuition cut affects two hypothetical students.

Jack comes from a better-off home; his family saved for his education and he works enough during the summer and the school year to avoid getting caught up in student loans. He will be very happy when he pays $495 less for tuition next fall. He might be a little less happy next spring when he pays his taxes and realizes that his federal and provincial tuition tax credits will be lower by about $125 as a result of the tuition cut, but he will console himself by thinking to himself that after all is said and done, he is still $370 better off.

Jill, on the other hand, is not as fortunate as Jack. She comes from a poorer family and as a result took a student loan last year for $7,000. Of this $7,000, she only has to pay back $6,000, which is where the threshold at which the provincial loan forgiveness program kicks in.

At first, Jill is happy to see the lower tuition. The problem starts when she receives her notice of assessment for student aid. To her surprise, it comes in not at $7,000 but at $6,505, or $495 lower than it was last year. This is because for every dollar that tuition is decreased, assessed need (and hence loans) will go down by the same amount.

If she were just losing loan dollars, Jill wouldn’t feel so bad. After all, every dollar less than she borrows is a dollar less she has in debt.

The problem is, she isn’t just losing grant dollars. Remember, the Government forgives loans over $6,000. So, last year, despite borrowing $7,000, she effectively got a $1,000 grant which reduced her debt to $6,000. This year, because she’s only borrowing $6,505, she’ll only receive $505 in loan forgiveness and will still end up owing $6,000. In other words, she’s no better off.

This makes Jill mad. The Government promised to reduce tuition for all PEI students, but it’s not working out that way. The Jacks of this world – better-off students who don’t need loans – are making out OK, but the Jills who are struggling with student loans get nothing.

It would be sad enough if this were the end of the story, but it’s not. If you thought Jill was mad when she realized that her remission cut cancelled out her tuition cut, just wait until next spring when she files her taxes. Like Jack, she’s going to find out that the reduction in tuition also means a reduction in tax benefits. Now, she’ll realize, the tuition cut doesn’t just leave her no better off, it’s actually made her $125 worse off.

So, to recap: The Government cuts tuition by $495. The better-off Jacks of UPEI – which probably represent around 65% of the population – will come out ahead by about $370 after all is said and done. The needier Jills of UPEI – roughly 35% of the population – will be worse of to the tune of $125.

In other words, the benefits of the $2 million dollars the government has allocated to this program will go mostly to better-off students while leaving the most vulnerable worse off. And I say “mostly” because there is another big beneficiary here: namely the Government of Canada, which will no doubt be pleased to know that it will be dishing out $300 000 less in tax credits to PEI students next year because of the tuition reduction.

Let’s be clear: though the tuition cut has some thoroughly perverse and pernicious effects, I doubt very much that provincial politicians knew that they would be making needy students poorer when they announced it. I think they genuinely wanted to help needy students and thought that reducing tuition would be the way to do it.

A more efficient and effective alternative would be to invest that $2 million entirely in student assistance. No one would be made worse off and 100% of the benefits would go to the needy and vulnerable.

Mr. Murphy and Mr. Binns still have time to change policies and not make the Jills of UPEI poorer still. Let’s hope they do the right thing.

Have a good weekend.

-Alex