The Canadian culture of debt

Regan Sarmatiuk, Staff

As tuition fees rise across the country, more and more Canadian university students are forced into debt in order to finance their education. Those who advocate for tuition fee freezes often make the argument that increases in student debt can only have adverse effects on accessibility of post-secondary education in Canada, and they are correct in pointing out the perils of high student debt rates. However, the big picture reveals an unmistakable trend: Canadians are collectively living in a culture of debt that reaches well beyond the bounds of student loans, and students must choose to buck this cultural trend if they desire financial stability.

There can be no denying that student debt in Canada has reached alarmingly high rates. A 2004 Statistics Canada study found that 45 per cent of graduates attaining a bachelor’s degree in the class of 2000 had student loans to pay off, and their average amount of debt was in the neighbourhood of $20, 000. Only 20 per cent of these graduates were able to pay off their debt in the first year or two after the completion of their degrees. One could easily argue that society has taught these graduates by example how to live comfortably with large amounts of debt.

As reported by Steve Maich in Maclean’s in Dec. 2004, the Bank of Canada has indicated that Canadians now owe $752.1 billion in collective debt, which amounts to 36 per cent more than they owed ten years ago. However, the Bank of Canada also indicated that Canadians’ personal disposable income has only increased by 15 per cent in the same ten-year span. This simply means that Canadians are spending money faster than they can make it — clearly a dangerous habit, especially if one is already contending with student loans.

As Maich also indicated, a large portion of the collective Canadian debt — about $500 billion — comes from mortgages fuelled by enticingly low interest rates, but these lowered interest rates have also contributed to a spendthrift mentality and an increase in non-mortgage financing and debts. The Vanier Institute of the Family (VIF), a national non-profit organization committed to research and advocacy for Canadian families, revealed in a 2005 report that between 1980 and 2004, the largest spending increases among Canadians have been on things such as entertainment, recreation and “educational and cultural services.”

Increased spending on such frivolous things as entertainment and recreation is hardly justifiable for a household in debt, but one would only need to look at the record-low national savings rate to realize that Canadians are no longer believers in the rainy day fund. According to a 2004 Ipsos-Reid study, 75 per cent of Canadians have less than three months worth of their salaries saved in the bank. Also, 75 per cent have normalized their debt payments, regarding them as a part of daily living expenses. This “buy now, pay later” mentality has largely been made possible by the increased use of lines of credit and credit cards.

According to the Canadian Bankers Association, there were 8.2 million Visa and MasterCards in circulation in 1977, and the net dollar volume (the total dollar amount of retail purchases and cash advances combined for all Canadians) was $4.04 billion. In 2004, 53.4 million cards were in circulation, while the net dollar volume skyrocketed to $192.17 billion. Thus, Canadians (who, on average, hold 2.6 credit cards) have clearly become more comfortable with credit card spending, in spite of the fact that credit cards generally offer extremely high interest rates. These high interest rates combined with reckless spending have no doubt contributed to the massive increase in personal bankruptcies — according to the VIF, 84, 000 Canadians declared bankruptcy in 2004, compared to only 42, 000 in 1990.

The statistics that show how deeply Canadians have become immersed in the culture of debt are indeed endless. What do all of these numbers really mean in terms of the future of Canadian personal finance? One group of “experts” seems to feel that this excessive debt and overall lack of savings amongst Canadians isn’t too dangerous, as long as interest rates don’t undergo any dramatic changes, thus affecting Canadians’ ability to make debt payments and stay above water. Another group of experts more wisely suggest that this propensity towards massive debt leaves Canadians in a position of extreme financial vulnerability, even to small changes in interest rates.

There is one thing, however, that the experts on all sides of the debate seem to agree upon: low interest rates will never fail to rise again. The average university student, then, must decide to either embrace the “culture of debt” or to reject the instability inherent in a lifestyle that regards excessive debt as perfectly normal.

At the very least, university students must do better than the average Canadian appears to be in terms of thoughtful consideration given to personal financial matters. In a 2005 Ipsos-Reid survey, 53 per cent of Canadians indicated that they would rather think about household chores such as cleaning kitchen cupboards than they would about organizing the state of their personal finances. While university students can’t necessarily control fee increases, they can decide to control their attitudes towards debt.