Student Loan Lessons From Abroad

WASHINGTON -- Americans owe more than $1 trillion in student debt. It’s a number fraught with anxiety, and it is driving concern over how the United States structures federal student loans.

Is there a better way? Critics often point to other countries' structures as models for an improved American system. But would those systems work in the U.S., with its deeply entrenched economic policies and unique brand of political and psychological conventions?

International researchers and policy makers from Australia, England, Germany and Sweden met at a conference here Monday to discuss those questions. The event, hosted by the University of Michigan’s Education Policy Initiative, explored how other countries structure student loans and how the U.S. system might be improved.

Three of those countries -- excluding Sweden -- use income-based repayment methods, which tie student loan payments to a percentage of the borrower’s income. While the U.S. government has its own income-based repayment options, they are heavy on paperwork -- and they are much less ubiquitous.

Some of the panelists argued that the U.S. higher education market is simply too different to implement a system like that of Australia or England. But where, others countered, does that leave the millions of Americans who can’t afford their payments?

“The most important word here is ‘insurance.’ Contingent loans offer insurance to people,” said Bruce Chapman, director of policy impact at Australian National University’s Crawford School of Public Policy and a designer of Australia’s student loan program. “If your circumstances change, your loan obligations change with it.”

In the U.S., graduates default on their loans when their incomes aren’t high enough and they can't make sufficient payments, Chapman said. And even when low-income graduates don’t default, their payments can eat up huge portions of their monthly incomes.

In Australia, which debuted an income-based repayment system in 1989, students don’t face those problems. Students who use the system don’t pay anything up front and instead begin to pay back their tuition once they reach a certain income threshold. Repayments are based on income and are collected through the tax system. This way, students are protected if something goes wrong: a lost job, a family emergency or simply a lifetime income that’s lower than expected.

“If you’ve got a sick child and you want to take that time off, [there's] no loan obligation,” Chapman said. “You pay a lot when you’ve got a lot. You don’t pay anything when you don’t have anything.”

England’s system is similar: if graduates don’t earn much, they don’t pay much; if they earn a lot, they pay a lot. Under a certain threshold, low earners don’t pay anything. Loan repayments are deducted directly from graduates’ salaries -- and after 30 years, all loans are forgiven.

Lorraine Dearden, professor of economics and social statistics at University College London, gave an example of a U.K.-style loan in the U.S.: say a low-earning B.A. graduate borrows $25,000. In the U.S., she would pay just over $250 per month for 10 years.

In Britain, she wouldn’t start paying until she turns 27 -- once her income meets a certain threshold. Her monthly payment peaks at just over $200, but she’ll be paying for 25 years. That’s a long time -- but the payments never go above 3 percent of her income.

“Income-contingent loans work, and they’re really good at the bottom of the income distribution,” Dearden said. “How that transpires in the U.S. system is really high default rates for dropouts and those earning low amounts of money.”

But in income-based systems, most of the risk falls to the government -- not to colleges and universities. That could also pose a problem if the U.S. adopted a similar system: when colleges don’t take on any of the risk, they are free to raise tuition indiscriminately. That’s why any widespread U.S. income-based system would need to continue to cap borrowing at a certain level, said Susan Dynarski, a professor of public policy, education and economics at the University of Michigan.

“An instrument we don’t have available to us is caps on tuition,” she said. “We don’t seem to have the political will for that. So barring that, we need to have caps on borrowing.” In England and Australia, loans are used for tuition. But even countries that have done away with tuition have their own versions of student loans. Public universities in Germany and Sweden do not charge tuition, but students take out loans to cover the cost of living.

But there’s a key cultural difference between Germany and Sweden that translates into both countries’ loan policies: parents’ role in their adult children’s education.

In Sweden, students are considered independent once they’re 18. In Germany, parental support plays a much larger role: even after German young people come of age, their parents are legally required to support them through school.

Not all German families can afford to support their children, of course. Students from poorer families can get financial aid, which is evenly split between grant money and zero-interest loans. The amount of support depends on parental income, and after 38,000 euros in annual net income, no support is awarded. Loans are repaid based on income, and they are forgiven after 20 years.

At the moment, 82 percent of German students are debt-free. Of those who graduate with debt, 50 percent have debt below €4,000.

But even if some Americans would be better off under an income-based system, would they want to use it? The U.S. has a unique set of assumptions and cultural norms concerning education -- and those can certainly translate into policy. Some of the panelists worried that income-based systems would face initial skepticism.

“My sense is that Americans would be like, ‘Wait a minute, I don’t want to pay for 25 years. That’s terrible. I want to be done in five,’ said Jason Delisle, director of New America’s Federal Education Budget Project. “We did some focus groups around income-based repayment. Twenty years sounded awful to them.”

And then there’s the reality of a changing cost structure: many older Americans paid for their education by spending their summers waiting tables, and now their children feel cheated, said Rohit Chopra, a special adviser at the Department of Education.

“The idea of paying for 20 to 30 years,” he said, “is not what they feel like their parents and their grandparents and their country promised them.”

But other panelists argued that Americans simply misunderstand these systems, dwelling on the time period without taking the low repayment rates into account.

And then there’s the matter of ease: often, income-based payments operate like Social Security payments. Borrowers see a deduction on their earnings, and they don’t need to fill out complex paperwork.

Dynarski thinks that the U.S. should integrate student loan repayments into existing systems -- like taxes or Social Security.

It would save administrative costs, and besides, perhaps it makes sense to treat loan repayments like Social Security: imagine, Dynarski said, if you kept getting bills for Social Security after you lost your job.

“With student loans,” she said, “the bills keep coming.”