The debt of parents will be visited upon their children.
That's not a Bible quote. It's economics.
Some parents owe so much they can't save adequately for their children to attend college or university, new research from the analysis firm Strategic Insight shows. The impact on kids could turn out to be a lifetime of indebtedness – from their student years into retirement.
Strategic Insight says total student debt rose 6.2 per cent annually over the past 10 years to $42.9-billion, which compares with an average inflation rate over the same period of 1.6 per cent. The debt numbers include borrowing from government student-loan programs as well as through banks via student lines of credit as well as credit cards. Statistics Canada previously estimated student debt at $28-billion back in 2012.
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Use of registered education savings plans has risen a lot in recent years, the Strategic Insight report shows. But the amounts being saved are weak, even for high-income families. The report quotes Statistic Canada as saying that median household RESP savings in the top 20 per cent for net worth was $18,750 in 2015. The estimated cost of a four-year degree, without books, transportation or living expenses, has increased by an average 3.4 per cent over the past three years to $24,492 on average.
The data on student debt are included in the soon-to-be-published 2017 edition of Strategic Insight's household balance sheet report, which looks at how Canadians are doing financially. The student-debt numbers tell a story of how the household life cycle of borrowing is being stretched. Pay close attention if you think low default rates on mortgages, lines of credit and other borrowing show high debt levels aren't a problem.
In a subtle way, debt may actually be an intergenerational problem. "Student debt is connected to the fact that parents are dealing with debt and high real estate prices," said Carlos Cardone, senior managing director at Strategic Insight Toronto. "They may not be able to save what they were supposed to save."
Strategic Insight says the average debt for a graduating student as of July, 2015, was $26,819. Statistics Canada has said that 50 per cent of students graduating with a BA relied on debts to pay for their education.
Mr. Cardone said students graduating with significant debt could buy houses and start families later life. Add on as many as 35 years to pay off mortgages, lines of credit and other borrowings, and you stretch debt into retirement. This could worsen the current trend of debt growth among retired people.
In a recent report by the credit reporting agency Equifax, people over the age of 65 showed the highest rate of increase in non-mortgage debt levels in the fourth quarter of last year. Mr. Cardone sees a lot of potential for retirees to go into debt. Already, his firm is noticing people moving into retirement with no appreciable assets other than their homes. This suggests they'll need to borrow against the value of their home to generate income in retirement.
Strategic Insight says student debt has soared despite a substantial increase in the amount of money parents are contributing to RESPs. These registered plans allow you to tap into 20-per-cent matching government grants that top out at $500 annually on contributions of $2,500. In total, $7,200 in grant money is available per student.
RESP assets have grown by 9.4 per cent annually in the past 10 years, while the share of households with children that are using RESPs almost tripled between 1999 and 2012 to reach 47 per cent. That's in line with use of other registered programs such as TFSAs. Nonetheless, contributors are likely to fall short.
"These savings, generally, are not sufficient," Mr. Cardone said. "Even families at higher incomes tend to have savings to cover, on average, a year and a half or two years of schooling."
I've had enough interactions with parents over the years to know that some believe it's the responsibility of their children to pay for university or college. The question is whether they actually believe their kids should have to climb this financial mountain alone, or if they're diverting attention away from the fact that they've borrowed too much to save.
Rob Carrick