Student Financial Aid:The Roles of Loans and Grants (Working Paper 37)

This paper addresses the roles of loans and grants as forms of student financial aid. It begins with a simple choice model where individuals decide to pursue post-secondary studies if i) the net benefits of doing so are positive and ii) no financing or liquidity constraints stand in their way. The effects of loans and grants on these two elements of the schooling decision are then discussed. It is argued that based on equity, efficiency, and fiscal considerations, loans are generally best suited for helping those who want to go but face financing constraints, whereas grants are more appropriate for increasing the incentives for individuals from disadvantaged backgrounds to further their studies. Loan subsidies, which make loans part-loan and part-grant, are also discussed, including how they might be used to address “debt aversion”. Given that subsidised loans have a grant (subsidy) element, while grants help overcome the credit constraints upon which loans are targeted, the paper then attempts to establish some general rules for providing loans, for subsidising the loans awarded, and for giving “pure” grants. It concludes with an application of these principles in the form of a recent proposal for reforming the student financial system in Canada. *

Cape Breton Provides Pointers for the Adjustment Programs Required by the Decline of the Old Economy (Working Paper 14)

The Cape Breton Development Corporation need not, should not, be dying in the way it is. “Devco” has been widely represented as a failure dragged out too long. In fact it had for a time considerable success in a role too difficult to be often attempted. The main failure was in the political will to stick to its purpose. This commentary is in three parts. The first, major section discusses the purpose of Devco and the policies that served the purpose quite well but were maintained for little more than a decade. It suggests that the benefits would have been greater if Devco had been started earlier in the period of postwar prosperity. The second section comments on the enfeeblement of Devco in the 1980s. The removal of its development function also weakened, and has eventually led to the abandonment of, Devco’s social purpose in the operation of coal mining. Third, a short epilogue pointing out that, while the Cape Breton case is extreme, there will be increasing need to moderate the socially disruptive consequences of accelerating economic change. There are lessons from the Devco experience: the longer remedial action is delayed, the more difficult and expensive it becomes, and the more necessary for its effectiveness is a steady political will.