CH 7 Blog

Student debt bankrupting a generation

http://www.financialpost.com/news/Student+debt+bankrupting+generation/4874861/story.html

Summary:

Canada is breeding a generation of “debt students” where their first job starts with paying off debt. Nearly 2 million Canadians have student loans worth as much as $20 billion and it includes provincial government loans, credit cards, and family loans. One reason for the increase in debt is tuition fees, which nearly doubled in the pass decade and other fees for necessities. However, the main problem is the interest rate implied on the loans. In a time of very low interest rates, the government charges 8% on student loans. Many students find that a nightmare especially how the interest begins to compound. The fact is that students own so much that saving up an account or starting a retirement program early is almost impossible. As a result, the economy suffers as the generation focuses their money in repaying the banks and saving money.

Connection:

The connection that seem obvious to me is the concept of the bank of Canada. As we know, in Canada the banks have the ability to do many things that will influence the economic conditions. For example, if the bank saw inflation as a serious problem it would try to reduce money supply. This connects with the article because the banks have the ability to change their policies about student loans to be more modest. Another connection is with the supply of money. Because everyone with a post secondary education is in debt, the nation’s GDP will feel the ripple affects as people are going to spend less to cover their debt. Therefore, it effectively decreases the velocity of circulation of money and market transactions. In other words, living off debt is not sustainable and the banks need to act to resolve this epidemic.

Reflection:

It may not be on the top to do list for the government and the banks but it will be of major concern in the near future. If I were to propose a solution to the problem it when be to reduce the interest rate while extending the repayment terms and there should be an adaptable rate to accustom each student for special cases. This really worries me, as I am also a student about to enter post secondary. I know for a fact I do not want to be spend half my life paying off student loans because of high interest rates. I hope the banks propose a plan to fix this cause eventually it may potentially shake the foundation of the country's economy.