The Centre for Global Higher Education (CGHE)
WORKING PAPER 16

How to solve the US’s student financing crisis

Nicholas Barr, Bruce Chapman, Lorraine Dearden and Susan Dynarski

In a CGHE working paper published today, researchers show that the US could solve its student financing crisis through the adoption of income-contingent loans.

The paper, ‘Getting student financing right in the US: lessons from Australia and England’ by Professor Nicholas Barr from the London School of Economics and Political Science, Professor Bruce Chapman from the Australian National University, Professor Lorraine Dearden from the UCL Institute of Education and Professor Susan Dynarski from the University of Michigan, highlights the fact that the US student loan system is currently in crisis. US graduates owe $1.3 trillion in student loans – seven million borrowers are in default and even more are in arrears.

The authors argue that this is mainly due to the fact that the US operates mortgage-type student loans: these are repaid over a set period of time, which places high repayment burdens on low-earning graduates.

The paper draws on the experience of the income-contingent loan systems operating in England and Australia, in which the regular amount to be paid by the borrower depends on his or her income.

Using data from the Current Population Survey (CPS), the authors show how such a loan system could be implemented in the US. They compare repayment burdens under the two systems, demonstrating that mortgage-type student loans can cause significant financial hardship for borrowers which in many cases leads to default.

By contrast, the authors conclude that a well-designed income-contingent loan scheme could be an efficient and cost-effective way of financing higher education in the US. Income-contingent loans can protect low-earning graduates from defaulting or experiencing financial distress, and simultaneously ensure that taxpayer subsidies are kept low.

Nicholas Barr is Professor of Public Economics at the London School of Economics and Political Science.

Bruce Chapman is Professor of Economics in the Crawford School of Public Policy at the Australian National University and a CGHE Co-Investigator. He designed the first national system of income contingent student loans for tuition, introduced in Australia in 1989 and followed by many countries, including the UK. He was President of the Economics Society of Australia in 2007-2013.

Lorraine Dearden is Professor of Economics at UCL Institute of Education and a CGHE Co-Investigator. She is a quantitative educational researcher who specialises in evaluation methods, and linked administrative and survey data. Her policy focus is on measuring school effectiveness and evaluating the effects of the home environment, education policy and skills formation on child and adult outcomes.

Susan Dynarski is Professor of Public Policy, Education and Economics at the University of Michigan.

About the Centre for Global Higher Education

The Centre for Global Higher Education (CGHE) is an international research centre focused on higher education and its future development. Our research aims to inform and improve higher education policy and practice.

CGHE is a research partnership of international universities, based at the UCL Institute of Education and funded by the Economic and Social Research Council (ESRC) and the Higher Education Funding Council of England (HEFCE). Our three research programmes integrate local, national and global perspectives, and our researchers are based in nine countries across five continents: Europe, Asia, Africa, Australia and North America.

Did you miss our previous newsletters? If you’d prefer not to receive future updates about our work, unsubscribe here.