Day: February 17, 2011

TARA PERKINS — FINANCIAL SERVICES REPORTER
From Wednesday’s Globe and Mail
Published Tuesday, Feb. 08, 2011 11:00PM EST
Last updated Wednesday, Feb. 09, 2011 5:56PM EST

As consumer debt levels soar and baby boomers approach retirement, the federal government is looking at adopting a long list of measures designed to prod Canadians into making smarter financial decisions.

The measures recommended by a federal task force cover a wide range of initiatives. Employers who offer pensions would be required to automatically enroll employees and escalate their contributions, so that employees would have to opt out rather than opt in. Financial institutions would be forced to simplify and improve information available about everything from mortgages to mutual funds. Tax breaks would be offered for workplace financial literacy programs, and students would be taught more about debt if they take out a student loan.

Finance Minister Jim Flaherty is to hold a press conference in Ottawa Wednesday to unveil the series of recommendations from the Task Force on Financial Literacy that he struck in 2009.

There are 30 recommendations in all, according to a source familiar with them, and they cover everything from pension plans to school curriculum. The idea is to spur Canadians of all ages and walks of life to learn better money management, helping to mitigate economy-wide headaches such as excessive debt loads and a potential pension crisis.

The task force’s report asks provincial governments to bolster money management education in the school system, and suggests that large public corporations should have to disclose what they are doing to further the cause.

The task force, chaired by Sun Life Financial Inc. chief executive officer Don Stewart, has based many of its recommendations on research it commissioned; that, too, will be released today. For example, the research shows that many Canadians aren’t accessing government benefits that are available to them because of complexities in the system and a lack of information.

The panel has also drawn on insights from behavioural psychologists to find ways to nudge Canadians toward better choices. An example: Research suggests that when a person knows they will be receiving money, but don’t yet have it, they are more likely to consider saving it that when they have cash in hand. With that in mind, the task force is telling Ottawa to change tax return forms so that consumers can opt to have the money deposited straight into a long-term savings account such as an RRSP.

The report calls on the federal government to appoint an individual who will be the country’s Financial Literacy Leader, accountable to the Finance Minister, to oversee the implementation of these recommendations.

Mr. Flaherty is expected to take action on the report relatively quickly because improving Canadians’ financial knowledge is a key issue for him.

“Financial literacy is something that the Finance Minister sees as a critical part of a strong economy,” said a government source. “Whether it is a question of saving for retirement, financing a new home, or balancing the family cheque book, improving the financial literacy of Canadians will add to the competitiveness and stability of our financial system and make our economy stronger.”

The report is being made public as Ottawa grapples with record consumer debt loads. Last month, Mr. Flaherty announced a series of measures designed to curb the growth of mortgage debt levels, including cutting the maximum term of insured mortgages to 30 years from 35 effective March 18.

In a bid to stoke the economy, policy makers spurred the flow of credit during the downturn, so that consumer spending could fuel economic growth. They are now dealing with the ramifications.

DIANNE NICE
Globe and Mail Update
Published Wednesday, Feb. 16, 2011 12:00AM EST
Last updated Thursday, Feb. 17, 2011 11:20AM EST

When a bus driver stopped to offer Signa Daum Shanks a free ride on a recent -27 C morning in Saskatoon she couldn’t have been more grateful. With thousands of dollars in student loans to start repaying in a few months, she’s looking for any way to save money.

For more than 20 years, Ms. Daum Shanks has scrimped and saved her way through a BA, an MA, a law degree, a masters of law and a nearly completed PhD. She has taken two years off between each degree to work and chip away at her debt.

Now 41, the assistant professor at the University of Saskatchewan’s College of Law can’t help wondering when she’ll be able to start living like a professional, buy a car and get serious about retirement savings. She’s making a good salary, but with $67,000 in student debt, plus condo payments, her other goals will have to wait.

“I just sort of feel a bit frozen about what to do,” she says, adding that if she’d known when she started her education how difficult it would be to make ends meet, she might have thought twice.

It’s a predicament that many students face, says Zach Dayler, national director of the Canadian Alliance of Student Associations in Ottawa. While post-secondary education is crucial to landing a good job, the cost of borrowing to pay for it can be staggering. And it’s not something students fully realize until their debts come due.

“You don’t really, truly understand what you’re getting into until you graduate and start paying it back,” says Mr. Dayler, 26, who did an MA in urban planning at Dalhousie University and has $40,000 in student debt. “I just graduated in May, and let me tell you, it’s a little bit of a wakeup call.”

Last week, the Task Force on Financial Literacy made 30 recommendations for strengthening Canadians’ money-management skills, including a call for mandatory financial education for students who qualify for the Canada Student Loans Program.

Don Stewart, chairman of the task force, says it’s important to use “teachable” moments, such as heading off to college, to educate students about financial planning. Too often, he says, students don’t know how to budget their spending to make their loan money last.

“Handing out money without some form of education and understanding is a bad idea,” Mr. Stewart says. “Anything that can be done to make people understand better what it is they’re getting into will be a plus.”

An estimated 4.3 million students have received almost $32-billion in loans since the national student loan program was created in 1964.

A national survey conducted by CASA shows that most students don’t understand the financial side of government loans. Only 31 per cent of those polled knew that to qualify for a student loan, they might be subject to a credit check, and just 23 per cent realized that interest on the loans begins to accrue immediately upon graduation. The interest on student debt can range between prime plus 1 per cent for a line of credit to prime plus 5 per cent for a loan.

“We’re giving a good chunk of money to sometimes some of the least financially experienced individuals out there,” Mr. Dayler says. “So we have to make sure that they’re protected and understand that student loans and loans in general are a serious financial risk and commitment.”

According to Statistics Canada, the cost of a year’s tuition for the average undergraduate student rose from $4,400 in 2006 to $5,138 in 2010. When you factor in other costs, such as rent, transportation and books, a single year of post-secondary education will cost students between $10,000 and $15,000, according to a 2007 study commissioned by the Canada Millennium Scholarship Foundation. According to the study, 59 per cent of undergraduate students graduate with debt, averaging $24,000 each

Matt Harding, 28, a lawyer at McCarthy Tétrault LLP in Toronto, says it’s too easy for students to lose control of their spending when they’re on their own. He has spent the first year of his career paying down the $80,000 he racked up on two student lines of credit, plus $30,000 in credit-card debt, while earning his law degree at the University of British Columbia.

“I didn’t really feel like I needed to live like a student, and was kind of reckless and ended up needing a second line of credit,” says Mr. Harding, who used some of the “free money” to travel. “By the end, I was so poor.”

It’s crucial that parents and teachers get students thinking about the costs of education well before it’s time to take out a loan, and to show them how to budget, says Perry Quinton, vice-president of marketing for the non-profit Investor Education Fund.

“You have to start thinking about it: and not just students, but their parents. It has got to be thought about years ahead of time so that you’re actually putting in the planning to figure out how you’re going to pay for this,” Ms. Quinton says.

The beginning of high school is a good time to get a plan in place because students are sitting down with their parents and guidance counsellors to pick out the courses that will set them on their future career paths, she says.

“There’s an opportunity to sit down and say, ‘By the way, it costs money, and how are you going to pay for it?’ ”

DEBT AVOIDANCE 101

1. Get educated

Before you borrow, find out how the loan process works. Learn about types of debt, what interest rates you’ll pay and how long it’ll take to pay off. Get your information from a reputable source such as CanLearn.ca, the government’s website about saving, budgeting and borrowing for post-secondary education.

2. Start saving early

The more you save through part-time work, the less you’ll need to borrow, and the earlier you start to earn interest on that money, the faster it will grow. A Registered Education Savings Plan allows savings to grow tax-free and may also qualify for free government money through the Canada Education Savings Grant and the Canada Learning Bond. Also, students who have Registered Retirement Savings Plans can make tax-free withdrawals under the Lifelong Learning Plan. They usually must be repaid within 10 years.

3. Apply for free money

Grants, bursaries and scholarships are tax-exempt and never need to be paid back. Search for government grants at CanLearn.ca. Find other sources of money at GlobeCampus.ca/money-finder.

4. Get relief

The federal government and most provinces offer repayment assistance programs for those having trouble paying off their government student loans. Information is available at CanLearn.ca.

5. Get cash back

At tax time, you’re entitled to a 15-per-cent tax credit on the interest you pay on your government student loans. You can also make an education claim of $400 per month, plus a non-refundable textbook tax credit of $65 for each month you’re enrolled in full-time studies.

TORONTO— The Canadian Press
Published Wednesday, Feb. 16, 2011 6:29AM EST
Last updated Wednesday, Feb. 16, 2011 6:38AM EST

There was a surprising drop in the amount borrowed on credit cards by Canadians during the holiday-laden fourth quarter, but overall non-mortgage debt went up substantially across the country, a credit analysis firm reported Wednesday.

TransUnion said average total debt per Canadian consumer, excluding mortgages, was $25,709 in the fourth quarter of 2010 – up 5.6 per cent from $24,346 in the comparable period of 2009.

Only a small portion of the total in either year was drawn on credit cards, which usually charge among the highest rates of interest.

The surprise, according to TransUnion, was that the average credit card debt in the fourth quarter of 2010 dropped by 2.7 per cent from a year earlier to $3,688.

Lines of credit were the biggest form of consumer debt tracked, and increased to nearly $34,000 – up 8.8 per cent over the year.

“From the increase in lines of credit this quarter, one can safely assume that many Canadians ultimately relied on this form of credit during the last three months of 2010 and the important holiday shopping season,” said Thomas Higgins, TransUnion’s vice-president of analytics.

“Since many lines of credit offer attractive interest rates, many Canadians have learned to use credit cards in their initial purchase and then pay off or down the balance using their line of credit. This allows them to take advantage of both the loyalty programs many credit cards offer and lower interest rates of their line of credit.”

Auto loans were the second-biggest form of non-mortgage debt tracked by the report and TransUnion found the Canadian average rose to nearly $16,200 per borrower in the fourth quarter, up 11 per cent from a year earlier.

However, it found that total auto debt for the country as a whole declined to $45.8-billion in the fourth quarter, from $48.3-billion in the comparable period of 2009.

“While total auto debt continues to decline in Canada, it is interesting to see auto debt per auto borrower rise,” Higgins said.

“This means those Canadians with autos loans are either purchasing higher end vehicles, or newer ones.”

TransUnion’s analysis is based on an active credit population of 24.9 million consumers in Canada.

DIANNE NICE
Globe and Mail Update
Published Thursday, Feb. 17, 2011 10:31AM EST
Last updated Thursday, Feb. 17, 2011 1:19PM EST

Canadian average household debt has hit the six-figure mark for the first time, according to a report released Thursday by the Vanier Institute of the Family.

The average household debt figure at the end of 2010 was $100,879, with the debt-to-income ratio at a record 150 per cent, the report says. That means for every $1,000 Canadian families earn after tax, they now owe $1,500. Mortgages account for two-thirds of that debt at $63,000 per household. The other third is made up of personal loans and credit card debt.

For the 55 per cent of Canadian households with mortgages, the average debt figure is even higher: $171,500. Those are the households that are going to be the most vulnerable when interest rates inevitably rise and housing prices fall, says Roger Sauvé, the report’s author. “Their payments are going to go up and the price of their house is going to go down. It’ll be more difficult.”

Households have also seen a steady decline in savings, from 13 per cent in 1990 to 4.2 per cent in 2010.

Mr. Sauvé says there’s only one message to take away from these numbers: “Reduce debt, save more, spend less.”

While household expenditures dipped 1 per cent in 2009 (adjusted for inflation), the cutbacks were short-lived, and by the end of 2010 had returned to 2008 levels. Spending in retail outlets followed a similar path, the report says.

“We’re still out there expanding our credit limits,” says Mr. Sauvé, who predicts the debt-to-income ratio could easily reach 160 per cent within the next two years if the trend continues.

Much of the expansion in credit growth has been due to record low interest rates, the report says. “Households have been able to take on higher levels of debt since the cost of borrowing has been, and remains, relatively low.”

Signs of debt stress are obvious, the report says. In October, 2010, 17,400 mortgages were in arrears by three or more months, up 50 per cent since the recession began. Compared to pre-recession levels, the 90-day delinquency rate on credit cards was up 28 per cent in July, 2010, and about 32,300 Canadians became insolvent in the third quarter 2010, up 12 per cent from pre-recession levels.

According to the Bank of Canada, about 6.5 per cent of households currently have a high debt-service ratio, meaning debt payments and interest amount to 40 per cent or more relative to their disposable incomes. The 10-year average is 6.1 per cent. The Bank of Canada model assumes that one-quarter of these 950,000 households is likely to default on debts.

“We’ve been tracking this report for 12 years,” says Katherine Scott, the Institute’s director of programs. “We’re certainly concerned about the levels of household debt and what that signals for the fragility of a significant number of Canadian families.”

Figures released Wednesday by credit bureau TransUnion echo the Vanier Institute’s findings, reporting average total debt per Canadian consumer, excluding mortgages, was $25,709 in the fourth quarter of 2010, up 5.6 per cent from $24,346 in the comparable period of 2009.

When you consider that in 1990, average family debt stood at $56,800, with a debt-to-income ratio of 93 per cent, household debt has seen a real increase of 78 per cent over the past two decades.

“I think we have a significant challenge,” Ms. Scott says. “There are many vulnerable families. Looking forward, I think we have to remember that we have to continue to invest in public supports for in particular income supports for Canadians and at the same time push forward recommendations around improved financial literacy.”