September 20, 1993

Other Press Telereg Extravaganza!

Big Banks Take Over Canada Student Loans Program

4

 

a good experience at the Canada Student Loan level, as people get
oN

by Simona Chiose

(Source: The Varsity, University of Toronto)

TORONTO (CUP) — “The federal government is expecting private
business to accept the losses associated with the Canada Student Loan
Program,” says Rob Callum, manager of personal loans for the To-
ronto Dominion Bank.

“No private business should have to accept that. Who in their
right mind would get into a business to lose money?”

Callum works for one of the many banks that bid for the right
to administer the loans program — and lost. Callum is _ not
pleased. And in an unlikely meeting of the minds, his opinion is shared
not only by the country’s biggest banks —. but also by student acre:
cacy groups.

What is at issue is the federal government's proposal to turn
the running of the rapidly-growing Canada Student Loans Program
over to commercial banks.

One of the proposal’s key elements would eliminate the stu-
dent loan guarantee and replace‘it with a “risk premium” which would
limit the number of loans available using a formula based'on the
number of loans currently outstanding. Student groups question the
philosophy of a proposal they say would see banks’ profits rise at the
expense of students’ financial needs and educational rights.

Combined with the elimination of the six month interest-
free period and the demise of grants, they say the proposal is one
more step in the government's privatization of higher education.

“Banks should not be able to profit from students having to
borrow money to pay for their education,” says Carl Gillis, chair of
the Canadian Federation of Students. “The banks are not going to take
this on unless they can make money from it. Does this government
believe in having a subsidized loan program or not?”

In December 1992, the federal government invited commer-
cial banks, trust companies and credit unions to submit bids to fi-
nance the loans program. By March, only two banks, the CIBC and

the Royal Bank, were asked to continue negotiations with the gov-.

ernment.

The bid request insists that banks must provide services across
Canada. But many students could be left without a loan centre in
their area.

“Geographically, if only one or two banks are handling it,
there could be problems for students who don’t have that bank in
their area,” says Deanne Fisher, liaison officer for the. Association of
Part Time Students at the University of Toronto.

The country’s biggest administrator of the loan program, the
Bank of Montreal, submitted a bid but was rejected. Compared to the

609 bank branches now active in administering student loans, hav-

ing only two banks will deprive students of the choice they have been
accustomed to.

And that number could be further reduced. In the bid pro-
posal, the government reserves the right to negotiate an “exclusive
arrangement for the [loan] portfolio”, possibly allowing one bank to
monopolize the student poverty market.

The CSL is not exactly a profit-making venture for the federal
government, but as student indebtedness grows, it is turning into big
business. In 1985, only 589 students owed more than $15,000 in
loans. By 1992, over 6,000 were faced with repaying that amount or
more.

The banks which win the bid will control a projected $4
billion market over the next five years — and will probably be one of
the first banks-students will deal with. The banks see themselves es-
tablishing a relationship with a future affluent client.

“The student market is a very important one for us,” says Rob
McLeod, spokesperson for the CIBC. “If we can provide students with

older and move into the job market, they will require more banking
facilities and hopefully will stick with this bank.”

Gillis, however, argues that banks will try to be selective to
ensure minimum losses. He points to one clause in the proposal which
allows banks to refuse loans to students who “have an established
history of credit abuse.”

“What does credit abuse mean? It is still not defined. Banks
could refuse those who had bounced a check, or had trouble making
payments on a credit card. Ironically this would weed out those who
really need the money.”,

“If a student passes the CSL requirement, they may still have
to jump through a second hoop to meet their banks’ standards.”

But Lauren Marcoux, spokesperson for the Secretary of State,
insists that determining eligibility criteria will remain the sole re-
sponsibility of the federal government.

“Eligibility would still be determined by the government to
ensure lenders would still be provided loans without having to have
co-signers, or submitting to any of the other regulations usually ex-
pected in the consumer loan market.”

Marcoux rejects the term “privatization” to refer to the pro-.

posal. He sg the initial aim of the Boe peablisned by the

Diefenbaker government in 1964, to provide accessible ae sec-
ondary education, will not be diluted.

“The program has always relied on the private sector to
administer it. In the current scheme, the government interferes -
to insure that students who can’t otherwise get loans, do so. It is
in the students’ best interests to establish a relationship with a
bank as it will give incentives to prevent defaults.”

While the default rate on Canada Student Loans is cur-
rently 5.2 per cent, almost double the consumer loan rate, the
government argues that under the new program the rate can be
reduced to 4.9 per cent. According to some reports, however,
the banks have countered with interest rates as high as 30 per-
cent a year, mostly to cover default rates.

The banks’ concern over defaults is ironic considering ~
their eagerness to capture future consumers. Fisher says that while
the wealthy. graduating student has- become a banker's dream,
rates of default have been exaggerated to the detriment of stu-
dents. ‘fT or

“What is a default?” asks Fisher. “As soon as a bank has a
letter returned they count that as a default. So the banks declare
a default and collect on their guarantee.” &

Government's Loan “Reform Will Hurt Students

by Am Keeling

(Source: The Charlatan, Carleton University)

OTTAWA (CUP) —The government introduced long-awaited changes
to the Canada Student Loans program this summer — but they will
end up costing students.

Bernard Valcourt, federal minister of human resources and
labor, announced in a summer press release that the three per cent
guarantee fee paid by students who receive loans will be eliminated
as of Aug. 1.

What the press release failed to mention, however, is that the interest-
free period on loans for six months after leaving school would also be
cancelled Aug. 1. /

For the call two. years, students who received. student loans
have had to pay a three per cent premium up front on the amount of
their loan. The government said it used this money to maké up for
students who defaulted ¢ on repaying their loans’ and to combat the
national debt.

“The fee was implemented to offset the fealty increasing
cost of implementing (loans) programs,” said Micheline Racette,
Valcourt’s press secretary. “The measure was successful.”

As well, students had a six-month grace period after finish-
ing full-time schooling during which the government made interest
payments on students’ loans for them.

The measures were originally proposed in the Tory budget of
February 1992, but it was not until Feb. 4 of this year that the Con-
servatives passed Bill C-76 that made the changes law.

Ron Duhamel, Liberal education critic, said the elimination
of the interest-free period would cost students leaving school an ex-
tra $35 million per year in interest payments on their loans.

Students will only save $25 million with the three per cent
tax gone, according to Duhamel. This means students will lose money
in the long run under the new measures, he said.

Carl Gillis, chair of the Canadian Federation of Students, said
his organization worked hard for two academic years to secure the
elimination of the tax. But he added the cancellation of the interest-
free period made the victory bittersweet at best.

“There's a side of me that’s cynical,” said Gillis, who -
_ admitted the move may have been a pre-election ploy as much as _
it was a CFS lobbying triumph.

Racette said the government's decision to eliminate the
tax was not a result of pressure from the CFS, but the change is
“part of larger reforms” planned for the loans system. She said
she could not comment of the nature of further reforms.

The changes will affect student loans negotiated after
Aug. 1, said Linda Fleming, a financial aid administrator at Carleton
University. Student loans will still be administered in the same
fashion, except that the tax will not be removed when the stu-
dent takes their loan to the bank to receive their money.

Racette said the elimination of the interest-free period
will not be a burden to students because they will be finished
school and trying to find a job. She said the $6,130 average yearly
loan amount is “well within the repayment ability of most bor-

rowers.”
But Duhamel said the lack of an interest-free period will

devastate students already facing a tough job market and increas-"
ing debt loads.
“Now there will be no reprieve,” he said.

There still might be in Saskatchewan. According to the
University of Saskatchewan newspaper The Sheaf, the province's
NDP government has offered to pay interest on all student loans
for the six months after leaving school.

Racette disagreed that student loan defaults — which
occur nearly twice as often as consumer loan defaults — will
increase due to immediate interest payments. “We don’t agree
that this will contribute to these problems,” she said.

Gillis said accessibility to student loans will be threat-

“ened further by Tory policies such as the privatization of loan

administration.

A government report, made public earlier this year, sug-

gested turning over more of the administration to one or two
private banks.
Gillis said under the government plan, private banks could turn
away students who are considered a bad credit risk. Under the
current program, a student merely has to establish financial need
to qualify for a loan. %