An International Final Four: Which Country Handles Student Debt Best?
In America, college student loan defaults are a really big problem. In Australia? No worries.
Although an American college degree remains a good investment on average — the higher earnings for most graduates justify the cost— millions of borrowers are in default on their loans.
Policy analysts generally agree on a need for reform, but not on which path policymakers should take. Can America learn anything from other nations? We gathered experts with a range of perspectives, from the United States and abroad, and asked them to compare the systems in Australia, Britain, Sweden and the United States.
We chose this grouping of nations because they highlight important differences both in loan repayment systems and in related policies such as tuition and loan limits, not necessarily because they all belong among the best systems in the world. In the spirit of March Madness, we devised a bracket-style tournament, seeding the countries so that those with more similar systems would meet in the semifinals.
Sweden vs. United States
Sweden and the United States differ in whether the monthly loan payment remains the same over time and in the number of years borrowers can repay their loans.
The average American borrower with a bachelor’s degree leaves college with $28,400 in debt. Students can borrow for both tuition and living expenses, although loan limits make it hard for an undergraduate to borrow more than $45,000 over four years.
In Sweden, average debt levels are similar — the equivalent of around $21,000 — even though students borrow only for living expenses (Swedish universities do not charge tuition). Interest rates are also very low; the current rate is 0.6 percent.
You have 4 free articles remaining.In the United States, borrowers are required to begin making payments six months after leaving college. By default, payments are set so the whole principal and interest, which is tied to the market rate at the time the loan is made (currently 4.45 percent), will be paid off in equal monthly installments paid over 10 years.
American borrowers can opt into alternative repayment plans, including plans that tie payments to income or that start lower and increase over time. Income-based plans offer forgiveness of any remaining balance after 10 to 25 years, but enrolling in these plans requires making a request to the servicer and filing paperwork annually. If you miss the paperwork, you are put back into a 10-year repayment schedule, but can ask to re-enroll. There are a large number of plans that are hard for borrowers to navigate, especially in times of financial stress.
Swedish borrowers, on the other hand, pay off their loans over a much longer period. Borrowers can be in repayment for up to 25 years, with the typical borrower paying for 22 years.
In Sweden, payments are automatically set so they increase by 2 percent each year. Borrowers can ask to reduce their payments to as low as 5 percent of income in cases of financial hardship, and any remaining debt is forgiven at age 68.
Our pick: Sweden (11-0)
Panelists generally saw Sweden’s extended repayment window as an advantage.
“The shorter term in the U.S.A. means that low-earning graduates will always struggle and be at risk of default,” said Lorraine Dearden, professor of economics and social statistics at University College London and a fellow at the Institute for Fiscal Studies.
Some panelists who chose Sweden noted that the automatic 2 percent annual increase in payment size in effect functions as an income-based system. “Borrowers pay less in the early years of their careers, when earnings are lowest and most variable,” said Judith Scott-Clayton, an associate professor of economics and education at Teachers College, Columbia University.
Other experts appreciated the simplicity of Sweden’s repayment system, especially compared with that of the United States.
“Sweden’s system, while maybe costlier than necessary, offers a simpler and more manageable repayment process for students,” said Kevin James, founder and chief executive of Better Future Forward. “In contrast, U.S. federal student loans offer a mishmash of subsidies and repayment plans that provide wholly inadequate protections to students relative to the money spent.”
Some panelists did point out that Sweden’s repayment policy benefits from the country’s tuition-free college and low interest rates. This could, however, be a problem for larger goals of equity.
“The downside with Sweden actually lies outside the student aid system, in the way they charge zero tuition to a student body which is heavily tilted to the children of the upper middle class,” said Alex Usher, president of Higher Education Strategy Associates in Canada. “With more targeting on fees, Sweden would be perfect.”
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Australia vs. Britain
In these countries, students take out loans in name only. The loans have principal and interest like regular loans, but must be repaid only if the borrower makes above a certain amount.
In both countries, payments are collected automatically through the tax system and adjust automatically with income — similar to tax withholding in the United States. Students can also choose to pay for tuition up front, but 85 percent to 90 percent instead take out an income-contingent loan.
Most English universities charge the maximum-allowed tuition of the equivalent of about $12,900, and students can also borrow for living expenses. The average debt load after leaving a degree program is more than $60,000.
Australia has lower tuition levels, which range up to the equivalent of $8,300 per year depending on the course of study, and lower average borrowing ($23,500). Australian students are also limited to borrowing only for tuition, not living expenses.
In Britain, borrowers start making payments once they earn at least the equivalent of $29,000 a year, at which point they pay 9 percent of their income above this threshold. (This threshold is set to rise to $35,000 beginning this month — subject to parliamentary approval.)
Australian borrowers do not start making payments until their income exceeds the equivalent of $44,000, although this threshold is set to fall to about $35,000 in 2018-19 to reduce the burden on the government and taxpayers amid warnings of rising costs. The percentage of income paid ranges from 4 percent to 8 percent depending on income, and it applies to all income, not just the amount above the threshold. The top rate may increase to 10 percent in 2018-19.
British borrowers pay an interest rate set at the inflation rate plus up to 3 percent, depending on income, whereas Australia sets the interest rate at the inflation rate for all borrowers.
Britain collects payments for up to 30 years, after which any remaining amount owed is forgiven. The typical borrower spends about 27 years in repayment. Australia collects payments as long as the borrower is living and making a sufficient income, but the typical borrower spends only nine years repaying the loans.
Our pick: Australia (8-3) [Sandy Baum, Mr. James and Ms. Scott-Clayton voted for Britain]
Simplicity is Britain’s main advantage, according to several of our experts. Those who preferred the British system also cited the forgiveness provision and the ability to borrow for living expenses as important factors.
“The English system has the advantage of providing students with loans for living expenses, not just tuition,” Ms. Scott-Clayton said. “This is an important feature for promoting equitable access to higher education.”
Nicholas Barr, professor of public economics at the London School of Economics, who ultimately picked Australia, summarized the trade-offs, arguing that the “U.K. design is better in principle but the system in Australia works better in practice.”
Mr. Barr pointed to some good design elements — Britain’s above-inflation interest rate and repayment based on income above a threshold — but noted that the system is politically unpopular because of the high loan amounts.
Ms. Dearden thought Britain’s interest rate was too high and likely to “disproportionately hit middle-earning graduates rather than rich graduates.”
Panelists generally liked Australia’s sliding-scale approach to the percentage of income paid toward student loans even though it adds a bit of complexity.
“If the Australian system is able to convey to potential students that the loan is income-contingent even though the exact repayment calculation is more complicated, then you’re less likely to distort labor market decisions while still getting the benefits of using loans to increase access,” said Bridget Terry Long, Saris professor of education and economics at the Harvard Graduate School of Education. “Also, students finish repaying their loans a lot faster.”
As in the first matchup, panelists also looked beyond repayment to the loan systems and the amount students are expected to borrow. “English tuition charges are excessive, and this contributes to the very large subsidies in that system, because a lot of the debt doesn’t get repaid,” said Bruce Chapman, professor of economics at Australian National University, as he cast his vote for Australia.
Sandy Baum, a fellow at the Urban Institute who ultimately chose Britain based on the availability of forgiveness and the use of an above-inflation interest rate, said, “In England, debt levels are too high, but that is about the pricing system and the lack of payments up front, not the loan repayment system.”
Mr. Usher’s conclusion echoed Mr. Barr’s: “The U.K. system is exquisitely designed according to rationalist principles, but it commands almost no public respect.”
Australia vs. Sweden (our pick: Australia, 11-0)
In unanimously choosing Australia, panelists agreed that automatic collection of income-based payments is a critical ingredient of a well-functioning loan system. “When borrowers have the choice to repay through their employer, this cuts out much of the red tape and the distorted incentives of middlemen,” said Rohit Chopra, a senior fellow at Consumer Federation of America.
But that does not make the Australian system perfect. “The inability to borrow for any living expenses might lead to higher-cost credit card debt,” Mr. Chopra added.
Lessons for the U.S.
Many of our panelists could not evaluate a loan repayment system without also considering the price of tuition or questions of access. There are big differences among the four countries beyond how students repay loans. Rethinking repayment is a start, but bigger changes to how students pay for college may be necessary.
Our panelists agreed that the best student loan repayment system is one that is simple, that is based on students’ incomes, that spreads loan payments over longer periods and that’s able to collect payments automatically through the tax system.
Such a system is a far cry from what’s in place in the United States. In Australia, student loan default is rare. In the United States, the number of borrowers in default rises every year, even if the default rate falls, because defaulted borrowers are unlikely to return their loans to good standing. Beyond the individual pain this can cause, it has negative consequencesfor the economy.
In its recent spending bill, Congress passed a one-time $350 million forgiveness fund to smooth problems for some borrowers. The government has made strides over the years with income-based repayment plans, but the plans are so complicated that Mr. Chapman, our panelist from Australia, once tried to fill out applications as an experiment and “couldn’t do it.”
Democrats and Republicans share blame for a system that seems broken, and major reforms don’t seem near. Maybe the first step is acknowledging that possible ideas for improvement don’t stop at the border.
We’re interested in what you have to say — whether you’re an American, or whether you’ve attended college abroad. In the comments section, tell us the best or worst feature of your country’s system. And what advice would you give Americans?
The judging panel, which includes us:
Nicholas Barr, professor of public economics, London School of Economics
Sandy Baum, fellow, Urban Institute (United States)
Bruce Chapman, professor of economics, Australian National University
Rohit Chopra, senior fellow, Consumer Federation of America
Lorraine Dearden, professor of economics and social statistics at University College London and fellow at the Institute for Fiscal Studies
Kevin James, founder and chief executive, Better Future Forward (United States)
Bridget Terry Long, Saris professor of education and economics, Harvard Graduate School of Education
Judith Scott-Clayton, associate professor of economics and education, Teachers College, Columbia University
Alex Usher, president, Higher Education Strategy Associates (Canada)
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