Strengthening income-based loan repayment — and getting more borrowers to use it — is a major topic of discussion in American higher-education policy circles. Income-driven repayment acts as a kind of insurance for borrowers. It protects those whose income is temporarily low, by making payments a percentage of earnings, and it protects those whose income is perpetually low if they can never repay their full debt.
The United States has a whole menu of loan-repayment options for borrowers with federal student loans, some of them income driven. While the existing income-based plans are tinkered withregularly, many experts have advocatedbigger changes that would streamline income-based repayment and make it the default or only option for borrowers.
As this conversation continues, there are lessons to glean from the experiences of countries like Australia, New Zealand, and Britain that already operate such systems.
To be sure, higher education works differently in other countries, and no one is suggesting the United States should adopt a foreign program off the shelf. Still, policy wonks working on income-based loans here know that they don’t have to start from scratch. Let’s take a look at what they’ve learned from Australia, the first country to build a fully income-contingent national loan program.
Keep It Simple
“One great benefit of the Australian system is simplicity,” said Andrew Norton, higher-education program director of the Grattan Institute, an Australian think tank. Australia offers one repayment option, unlike the myriad choices in the United States.
Australian borrowers don’t have to jump through hoops to get into the right repayment plan or to document their income, two challenges American borrowers can face. The Australian system automatically connects the size of payments to borrowers’ incomes, and payments are made through the tax system. That means payments are essentially compulsory and are easy to administer, said Conor King, executive director of Innovative Research Universities, an association of Australian institutions. The system, he said, is “as painless as you can make such an arrangement.”
At the time the Australian repayment system was introduced, in 1989, student loans were a new reality in the country — tuition had been free. Still, the program has been pretty popular. “Across the political spectrum, no political party has ever said they’d get rid of it,” said Bruce Chapman, a professor of economics at Australian National University’s Crawford School of Public Policy and architect of the country’s repayment system.
Pieces Need to Work Together …
A loan-repayment system has many features. The challenge for policy makers is making sure those features add up to something that makes sense, both for borrowers and for the government.
Here’s an example: Australia doesn’t charge real interest on its student loans, which are instead indexed to inflation each year. Nicholas Barr, a professor of public economics at the London School of Economics, is an overall fan of the Australian loan scheme but sees this as its great flaw, since it makes the program more expensive for the government.
Mr. Chapman disagrees. The context here matters, he said. Australian students can borrow more through the program now than they could when it began, but they can still get money only for their direct educational costs, not to cover their living expenses. That, Mr. Chapman said, prevents these from becoming no-interest loans to subsidize students’ purchases of luxuries unconnected to higher education.
Australia also does not have a forgiveness provision. Even if their income is so low that they don’t have to make payments, borrowers carry the debt until death. That feature is more palatable because total loan burdens don’t grow for low-income borrowers the way they do in the United States, where interest is charged.
In the United States, getting rid of the forgiveness provision probably wouldn’t be possible politically — and might not be good policy, anyhow — said Sandy Baum, a senior fellow at the Urban Institute. But even so, she said, “we should recognize there are effective income-based systems that don’t have forgiveness.”
… in Part Because of Cost
Ms. Baum is a fan of income-based repayment, but she worries that with the current options in the United States, “we’re designing a program that could do itself in” due to its high cost. That means its more-expensive aspects are worthy of examination to ensure the program can be sustained.
Cost is a concern in Australia, too. There, the government expects that roughly 20 percent of what it lends won’t be recovered — the system was never meant to recapture every dollar lent out.
Even though the Australian system withholds forgiveness until death, Mr. Norton thinks even that is a little too generous. Grattan has proposed that the Australian government should instead collect repayment from the estates of borrowers whose assets exceed a certain amount.
The proposal stems in part from another quirk of the Australian system: Borrowers don’t have to make any payments until their incomes hit about $54,000 Australian (about $39,000 U.S.). America doesn’t require repayment from borrowers with incomes below a certain amount, either. Its determination is more complex: Payments are based on a percentage of borrowers’ discretionary income (the difference between what they earn and 150 percent of the poverty line) and are also tied to family size. A borrower without a spouse or child must start making payments for earnings of around $20,000.
Australia’s relatively high income threshold could be seen as a pro or a con, Mr. Norton said. It gives borrowers more room to establish themselves before they must start repaying, but it costs the government.
Because of the way Australia’s income threshold is set, part-time workers typically don’t have to make payments. And many Australian women take time out of the work force in their 20s and 30s to raise children, Mr. Norton said, and if they return, they do so working part time. That means there are borrowers who don’t pay down any student debt for long stretches of their careers but may have a partner who’s making good money. As a result, a protection meant to help people with relatively low incomes ends up benefiting more affluent families, too. The Grattan idea of collecting debts from borrowers’ estates is meant to close that loop.
Language Is Key
Australia did something clever when it started its system, said Mr. Barr, of the London School of Economics: It avoided using the word “loan.” Originally, the Australian system was known as HECS, the Higher Education Contribution Scheme.
Britain did not follow suit when it adopted an income-based repayment scheme similar to Australia’s, leaving Mr. Barr to constantly clarify that participating in his country’s program is less like carrying credit-card debt and more like paying taxes. He tries to hammer home this point even more by putting the total amount graduates will repay for their education in the context of the much larger sum they will probably pay in taxes over their careers.
The fact that payments in Australia’s system are made through withholding also probably changes the way borrowers think about them, Ms. Baum says. It’s less a payment than one more part of their income they never see.
Ultimately, the best lesson from Australia may not be in the specifics of its repayment program. The idea of income-contingent repayment has been around since the 1950s, but Australia proved that an entire national student-loan system could be based on it.
Beckie Supiano writes about college affordability, the job market for new graduates, and professional schools, among other things. Follow her on Twitter @becksup, or drop her a line at [email protected].