Student loans in Canada are extremely complicated, and allocated to individuals with the least amount of experience with consumer loans. Despite a lack of a credit history or credit rating of their own, they are asked to make significant decisions and choices about very complicated financial products. Counselling is rare and published information is opaque. And students who opt for loans rarely have a choice about doing so; taking them is usually a last resort when family contributions and work alone do not suffice.
The purpose of this paper is to explore the conflation of these two factors—inexperienced individuals with complicated borrowing. As part of the Canadian Student Survey, a pan-Canadian survey involving over 20,000 students, a series of questions regarding financial aid were posed. The results give an excellent portrayal of the state of student aid literacy, as well as some intriguing results about how different sources of information help – or hinder – students’ understanding of student assistance.
Overall, the research found that there was a significant lack of financial aid literacy among Canadian university students, and the problem lies, in part, with the sources of financial aid information that students are turning to.
The key research findings were as follows:
- Students were very poorly informed about the details of the government financial aid system. Three-quarters of them failed our financial aid literacy test. Even among upper-year government loan recipients, who have some of the best reasons to know the answers to this test, the failure rate is still 54%.
- A large number of students were unaware of aid that might be available to them. This was the case for 29% of students who both did not take out loans or grants and were unaware that grants for low-income students were available for non-loan recipients, as well as for the 48% of students who did not realize that loans are available to part-time students, and for the fifthyears who did not apply for government loans because they believed they would not receive sufficient government funding – 71% of whom were unaware that their parents’ income would not be taken into account. It is certainly the case for the one in eight non-loan recipients who simply did not know how to apply for a loan.
- Many students who had loans did not know the basic details about repayment. They were confused about repayment dates and interest rate accrual, and will find out that they owe more money than they had expected.
- Sources of financial aid information impacted student knowledge. One quarter of students used only friends and family for their financial aid, and these individuals performed the worst on the financial aid quiz. Students who reported using information imparted by high school guidance counsellors did not perform much better. The most effective sources, federal and provincial government websites, were only used by about 40% of students; however, use of these government web sites improved student test scores by less than ten percentage points. The potential impacts of this illiteracy are far ranging and detrimental. For some students, the lack of knowledge will make their repayment process more painful than necessary; for others, financial aid illiteracy has shut them out of the government financial aid system altogether.
In short, the challenge facing policymakers is two-fold. First, student exposure to the most effective sources of financial aid information needs to be increased. The quarter of students who are using only friends and family for information need to be enticed to turn towards more reliable sources; government websites, in particular, are a relatively effective source but are used by only four in ten students. Second, the quality of sources needs to be improved. While there is no clear way for policymakers to directly improve the quality of information coming from parents, friends, or siblings, there are certainly policy levers for improving institutional sources. Government websites are the easiest to change, and although they are the best performing source that we consider, there is still much room for improvement. Although improving the effect of university financial aid offices and high school guidance counsellors is less straightforward, this is also a very important area to explore – 48% of students use one of these two sources as a principle source of financial aid information.