Americans owe over $1.5 trillion in student loans. And with that figure increasing every year, the US is facing a nationwide crisis. The burden of student loans has negative effects on the individual, too: it leads to less homeownership, lower marriage rates, lower birth rates, and lower levels of innovation. Further side effects include decreased mental and physical health, restricted career choices, and lower job satisfaction.
American student debt has exploded, mainly due to the consistent rise of tuition and fees. The cost of attending university has gone up over 1,100 percent since 1978. Funding cuts to public education haven’t been offset by government assistance; on the contrary, the government has left it to universities and colleges to raise tuition. In the last ten years, tuition at four-year schools has gone up by an average of 35 percent. Where is this extra money supposed to come from?
In America, the answer is that the money is supposed to come from private lenders, who are able to charge high-interest rates in complicated repayment schemes. But who does that benefit? If America wishes to be first in industry, science, and education, then it needs to have a workforce that’s liberated to innovate, instead of one that’s restricted to shelling out strangulating monthly payments.
While the most progressive response to this crisis would be to lower the cost of higher education, that does little to assuage the $1.5 trillion in student debt that’s already in circulation. To tackle existing student debt requires a radical new approach to how that debt is issued, structured, repaid, and managed. To that end, numerous improvements can be adopted and implemented by copying the homework of our friends abroad.
In Australia’s income-based system, tuition figures are based on the potential earnings of the specific degree being pursued. Degrees fall into one of three tiers: tier one degrees include medicine and law; tier two degrees include health-related and tech-related fields; and tier three degrees include the humanities, education, and the performing arts.
Upon graduation, borrowers don’t have to repay anything until they achieve a certain income level (around $35,000 USD). Borrowers then pay between 4 and 8 percent of their yearly income, with the interest rate pegged to the inflation rate. Student loan debt is repaid through the income tax system, which helps avoid loan default. The typical loan is paid off within nine years.
Similar income-based repayment options do exist in the US, but they’re needlessly complicated. According to the Consumer Financial Protection Bureau, income-based repayment in the US is neither promoted nor explained adequately in official literature. As an experiment, an Australian economist and doctoral student attempted to fill out applications for such income-based repayment plans in the US. They gave up after four days of repeated failure. Policymakers in the US shouldn’t give up on the idea of simplifying an income-based repayment plan so quickly.
Canada’s policies regarding student loans are similar to those in the US but injected with a small dose of compassion and critical thinking. The federal government provides up to 60 percent of a student’s tuition through the Canadian Student Loan Program (CSLP), while private lenders pick up the rest of the bill. All student loan payments are suspended until a student graduates and earns at least 25,000 CAD annually.
Those who are unable to make their usual payments due to financial burden or disability can apply for the government’s help through a Repayment Assistance Plan (RAP). Depending on someone’s income levels, they may be required to pay no more than 20 percent of their income, or they may not be required to pay anything at all. After five years of being on a RAP (or ten years after finishing school, whichever comes first), the government will begin to cover both the principal and interest that exceeds someone’s RAP-adjusted payment. And, with consistent eligibility, the government will repay all of someone’s student loans 15 years after leaving school. This gets the debt off the books and educated citizens working to their full potential.
One intriguing facet of the Canadian system is the way they incentivize debtors to work in the benefit of the less fortunate. For example, the government will forgive 8,000 CAD per year in loans to doctors and 4,000 CAD per year to nurses and nurses practitioners, as long as they work at least 400 hours in a remote or rural community. The benefit can be claimed for a total of five years, which adds up to a significant amount of free money. While doctors and nurses in the US may have to look to the armed forces for a similar loan-forgiveness system, the Canadians have devised more community-based win-win situations.
Germany has a higher education system that’s easy to categorize as idyllic, but it wasn’t always this way. The current state has been a process of evolution.
Student loans first came to West Germany in 1971, under a federal training assistance act now known by its shorthand, BAföG. This assistance began as an interest-free loan that had to be repaid after graduation. Even after tuition was removed from public universities, the financial aid system stayed in place. When West Germany merged with its more socially-minded sibling, East Germany, in 1990, the loan system was overhauled so that 50 percent of all student loans were treated as scholarships, which did not have to be repaid, while the other 50 percent remained as interest-free loans.
But, as in Canada, the Germans knew the incentivizing power of money: students would be forgiven up to 20 percent of their loan if, for example, they finished college ahead of schedule (in three years instead of four) or if they finished in the top ten percent of their class.
Producing high-performing citizens in an efficient and faster-than-average timespan turned out to be a worthy investment: a country that was separated and war-torn now enjoys both a well-educated populace and the continent’s strongest economy.
While Swedish universities don’t charge tuition, their students still take out a significant amount of loans to cover the high costs of living incurred while going to school. The average person’s student debt in Sweden is around $21,000, which isn’t far off from the American figure of $37,400. The difference, however, is in how those loans are issued, structured, and repaid.
In Sweden, interest rates are very low to start (around 0.13 percent), which makes the market rate in the US (4.45 percent) look astronomical. Furthermore, the default setting for US student loans is that they are to be paid off in equal installments over ten years, while Swedish borrowers repay over an average of 22 years (though they are allowed up to 25). The longer repayment window reduces risk of default and allows borrowers to pay less in the earlier (and more tumultuous) period of their career. And, due to the longer timespan, monthly payments only come out to about 3.8 percent of monthly income, according to one study by the Educational Policy Institute.
There’s also more flexibility: loan payments in Sweden are set to automatically increase by 2 percent each year, but borrowers may reduce their payments to as low as 5 percent in times of financial struggle.
While there are customizable repayment schemes available in American student loans, to enroll in them is complicated. Failure to follow a thorny list of repeated bureaucratic procedures leads to being placed back in a standard ten-year plan. The large number of available plans with all their individual requests places significant stress on a debtor who may already be experiencing plenty of stress on their own.
While the UK still lags behind Australia, Canada, Germany, and Sweden in terms of student debt, it’s still ahead of the US thanks to slight tweaks in its overall policy.
First of all, they have a standard system of income-contingent repayment. That means student loan payments don’t start until a graduate’s income exceeds a certain threshold (19,000 GBP), and only then do they pay 9 percent of the income that’s above that threshold. That means debt isn’t increasing exponentially while a student is in school, nor while a recent graduate is hunting for work.
Furthermore, government-mandated interest rates are set at the inflation rate plus 3 percent, which prevents overly predatory practices by lenders. And, as in Australia, student loan payments are made through the tax system, which streamlines the process and reduces the chances of default. While none of these practices are necessarily innovative, they’re close to best practices and simple to implement; Washington should take note.
If you believe that student loan debt is hindering rather than helping the economy, you’re not alone. This is a problem that can be addressed right now. To get involved in building a cheaper, smarter future, check out some of the resources below: