Why the Australian Student Loan System May Have the Right Idea

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College costs and financing options vary around the world. In the U.S., student loans can place a huge burden on borrowers, with some graduates forced to make the tough choice to delay changing careers or saving for retirement while they pay off their student loan debt.

A New York Times report originally published in 2016 points out that student loans are common elsewhere in the world, but in most cases, borrowers in other nations don’t face the same overwhelming burden that some Americans do.

For example, we all know that those first few years after graduation aren’t the most lucrative, and if you stay on the standard repayment program, your monthly payments will be the same for the duration of your loan, even if your income fluctuates. It’s essentially a mortgage-type payment.

This is not the case with the Australian student loan system, where everyone gets the equivalent of an income-driven repayment plan. In order to get an idea of possible alternatives to the American system, let’s take a deeper look at the Australian method and whether it would work in the U.S.

How the Australian student loan system works

Under the Australian student loan system, the government-administered Higher Education Loan Programme (HELP) provides interest-free loans to university students. Instead of charging student loan interest rates, the loan balance is indexed based on cost of living increases.

Under HELP, borrowers do not have to make any loan payments until their income reaches a certain threshold. The figures are adjusted from time to time. Repayment for the 2019-2020 academic year begins at 1% of a borrower’s income once it reaches 45,881 Australian dollars (about $32,000).

After that, the repayment rate scales up based on how much the borrower makes. There are 17 additional income thresholds up to 134,573 Australian dollars (about $93,000), beyond which repayment is set at the maximum 10% of income. That means Australian college graduates who land high-paying jobs right out of school extinguish their debt quickly, and those whose income remains low have a lower student loan repayment obligation.

Can we emulate the Australia student loan system in the U.S.?

There’s one important thing to note about the U.S. student loan system. When President Lyndon Johnson signed the Higher Education Act of 1965 — which, among other things, provided financial assistance to students — fewer people pursued college degrees, and tuition was much cheaper than it is today.

Johnson had good intentions in creating these educational programs, but he probably couldn’t have predicted just how expensive college would get within a few generations. And although the law has been amended since its initial passage, the size of America’s student loan debt crisis suggests more changes are needed.

In fact, the differences between the U.S. and Australia in the price and scale of higher education pose a major obstacle to bringing Australia’s system here. In Australia, taxes are a slightly larger share of the country’s gross domestic product, and Australia also has a much smaller population than the United States does.

“To roll out [a program like Australia’s HELP] across America would be a massive economic impact because of the size of the population and the vast number of educational institutions,” said Michelle Hutchinson, who works at personal finance website Finder and is a graduate of Macquarie University in Sydney, Australia.

Mimicking the Australia student loan system in the U.S. could lighten the burden on borrowers, but it would take a large infusion of money first to roll out programs like HELP.

“The economy will benefit but it would be a medium-to-long-term gain if it did that,” Hutchinson said.

With the presidential election season underway in the U.S., a number of candidates have made proposals to reduce college costs and make student loans easier to repay. Some have even proposed making all public colleges free or eliminating existing student debt. But only time will tell whether any of these plans are enacted, or whether the U.S. can move to a more Australian way of dealing with student loans.

Peter Fleming contributed to this report.

Published in Student Loan Repayment

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