The Economics of OSAP

Written By: Natasha Kozak

If you gave the average person $100 while walking by them on the street they would probably ask questions. “Is this real?” “Why are you giving this to me?” Imagine you told them the money was free. More often than not, they would repeat the age old phrase: there’s no such thing as free money.

Interesting how that works with $100 cash, but when given thousands of dollars of free money, very few students will ask those same questions. The reality is many post-secondary students receive this free money every year in the form of OSAP; the Ontario Student Assistance Program. OSAP is a mix of government grants and loans that help students pay for their university education and its associated costs. Students apply for the assistance and are given the money based on the financial status of the student and their household. This program has been running since 1999 and is a significant expense in the provincial budget every year (Government of Ontario, 2019). The question this article aims to answer is why? Why has the government taken it upon itself to give out free money?

Altruists among us may jump to simple answers- the government wants a more educated population or the government wants its citizens to reach their educational goals. Cynists among us may conclude the government wants the younger vote and feels they need to fund post-secondary education to do so. Economists among us would say there’s a deeper answer. One that involves efficiency.

The Economic Benefit of Education

The economic benefit of education is twofold. On one hand, it typically benefits the student by giving them an opportunity for a higher paying job. According to the Organization of Economically Developed Countries (OECD), the rate of return on education is between 6.1% and 18% in terms of financial wealth after attending a post secondary institution (OECD, 2008). The other benefit is to the community; or in this case, the province at large. The unemployment rate decreases as the average education level of a population rises (OECD, 2008). Furthermore, the country’s economy is heavily dependent on the education and training of its labour force (Radcliffe, 2020). These effects can be explained through use of the Cobweb Model.

Figure One: Illustration of the Cobweb Model. (Julie Bang, Investopedia)

This model shows how an increase in the short run supply of labour first causes a wage increase with highly skilled labour entering the workforce. Highly educated people are theoretically more productive; thus, the ability of firms to use labour increases along with growth potential. This is the shift seen up the long run supply curve (Radcliffe, 2020).

Since the growth of labour supply increases potential productivity of a province, the government seems to be justified in wanting to promote higher education.

OSAP in the Current Economic Situation

Given the financial reward of a highly educated population to the province, OSAP can now be considered an investment. Investing in education now should result in an increased labour force and increased growth in future. Unfortunately, the Auditor General of Ontario found this was not the case. After the growth of OSAP was called “unsustainable” with projected costs of $2 billion in the 2020/2021 year, the Government of Ontario made some changes to the program in its 2019 budget (Government of Ontario, 2019). They decided to give out more loans and fewer grants so students would need to pay the money back, and they decided to narrow the criteria to limit the number of high income households that were able to receive the funds. Judgement on this policy decision is for others to decide; however, it is important to understand how changes to OSAP funding impact its underlying goal: to create a more productive labour force that can sustain industries with higher added value and greater GDP returns.

A program like OSAP is meant to be an incentive; providing a means to higher education

The problem is, household income may not be the only factor determining how much money is needed to incentivize higher education. Some parents save for their children for years using RESPs while some parents believe it is the responsibility of the child to pay for education. Unfortunately, it would be costly and cumbersome to interview every applicant to see the extent to which they need OSAP to achieve post secondary education.

Right now, the OSAP system is changing and it is hard to strike an optimal balance between providing an incentive to increase the skilled labour force and redistributing wealth to promote equality. Only time will tell what methods work better than others; especially since it takes years to reap the rewards of higher education in the labour market. OSAP distribution is part of Ontario’s competitive plan. It is an investment to increase productivity in future. It is no such thing, as free money.

Works Cited

Government of Ontario. (2019). Building an Innovative and Sustainable Postsecondary Sector.
Ontario Provincial Budget 2019. Chapter 1d.. Retrieved from the Government of Ontario
Budget website: https://budget.ontario.ca/2019/chapter-1d.html#s-4

Neves-Hua, A. (2019). PC Government OSAP Announcement. The Medium. Retrieved from:
https://themedium.ca/news/pc-government-osap-announcement/

OECD. (2008). Education at a Glance 2008. Retrieved from:
https://www.oecd.org/berlin/42244848.pdf

Radcliffe, B. (2020). How Education and Training Affect the Economy. Investopedia. Retrieved
from:
https://www.investopedia.com/articles/economics/09/education-training-advantages.asp

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