WASHINGTON — Americans owe more than $1trillion in student debt. Its 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#39; structures as models for an improved American system. But would those systems work in the US, 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 Michigans Education Policy Initiative, explored how other countries structure student loans and how the US 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 borrowers income. While the US 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 US 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 cant afford their payments?
The most important word here is lsquo;insurance. Contingent loans offer insurance to people, said Bruce Chapman, director of policy impact at Australian National Universitys Crawford School of Public Policy and a designer of Australias student loan program. If your circumstances change, your loan obligations change with it.
In the US, graduates default on their loans when their incomes arent high enough and they can#39;t make sufficient payments, Chapman said. And even when low-income graduates dont default, their payments can eat up huge portions of their monthly incomes.
In Australia, which debuted an income-based repayment system in 1989, students dont face those problems. Students who use the system dont 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 thats lower than expected.
If youve got a sick child and you want to take that time off, [there#39;s] no loan obligation, Chapman said. You pay a lot when youve got a lot. You dont pay anything when you dont have anything.
Englands system is similar: if graduates dont earn much, they dont pay much; if they earn a lot, they pay a lot. Under a certain threshold, low earners dont 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 UK-style loan in the US: say a low-earning BA graduate borrows $25,000. In the US, she would pay just over $250 per month for 10 years.
In Britain, she wouldnt start paying until she turns 27 — once her income meets a certain threshold. Her monthly payment peaks at just over $200, but shell be paying for 25 years. Thats a long time — but the payments never go above 3percent of her income.
Income-contingent loans work, and theyre really good at the bottom of the income distribution, Dearden said. How that transpires in the US 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 US adopted a similar system: when colleges dont take on any of the risk, they are free to raise tuition indiscriminately. Thats why any widespread US 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 dont have available to us is caps on tuition, she said. We dont 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 theres a key cultural difference between Germany and Sweden that translates into both countries loan policies: parents role in their adult childrens education.
In Sweden, students are considered independent once theyre 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, 82percent of German students are debt-free. Of those who graduate with debt, 50percent have debt below euro;4,000.
But even if some Americans would be better off under an income-based system, would they want to use it? The US 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, lsquo;Wait a minute, I dont want to pay for 25 years. Thats terrible. I want to be done in five, said Jason Delisle, director of New Americas Federal Education Budget Project. We did some focus groups around income-based repayment. Twenty years sounded awful to them.
And then theres 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 theres the matter of ease: often, income-based payments operate like Social Security payments. Borrowers see a deduction on their earnings, and they dont need to fill out complex paperwork.
Dynarski thinks that the US 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.