Student loans place a huge burden on American students, and many graduates make the tough choice to delay marriage or home ownership while they pay off debt.
A recent New York Times article points out that elsewhere in the world, student loans aren’t unusual. But in most cases, borrowers of international student loans don’t face the same overwhelming burden that some American borrowers do.
One factor cited in the NYT article is longer repayment terms in countries like Sweden, Germany, and England. In Sweden, for instance, borrowers pay back student loans over 25 years, while the typical student loan terms for American borrowers is 10 years.
We all know that those first few years after graduation aren’t the most lucrative, and unless you’re enrolled in an income-based repayment program your monthly payments will be the same for the duration of your loan, even as your income fluctuates. It’s essentially a mortgage-type payment.
Not so in countries like Australia.
International student loans: Australia, Latvia, and the Netherlands
The government-administered Higher Education Loan Programme (HELP) provides interest-free loans to Australian 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 ($54,869 for the 2016-2017 income year). Once your income hits that threshold, your repayment rate scales up based on that income.
For instance, if you earned between $54,869 and $61,119, you’d repay 4 percent of your loan. As your income increases, your student loan repayment rate also increases. If your income drops, so do your loan payments.
That means Australians who land high-paying jobs right out of school extinguish their debt quickly, and those whose income remains low enjoy a low student loan repayment obligation.
The Australian government is ending discounts for upfront payment next year, but it currently offers a 10 percent discount for voluntary upfront payments, which incentivizes borrowers to pay off their debt sooner.
“The cool thing that I took advantage of when I was at uni was the incentive to pay off the debt while I was studying and after I was studying,” says Michelle Hutchinson, money expert at personal finance website Finder and a graduate of Macquarie University in Sydney, Australia.
“If you pay some of the debt over $500, you receive 10 percent off. If you wanted to pay your whole debt upfront you’d only need to pay 90 percent,” she adds.
Meanwhile, Arthur Gopak, now CEO and editor-in-chief of Millennial business portal AlphaGamma, earned an undergraduate business degree in Latvia and a Master of Science degree in the Netherlands.
Gopak took out loans to pay for his undergraduate degree and says in Latvia, banks provide loans to students but the government subsidizes the interest so that payments are affordable even in an entry-level job. Compare that to the US’s subsidized loans, which only pay your student loan interest rates for a limited time period.
Gopak says it’s common in Latvia to use the student’s parents’ income as collateral (similar to how some American parents cosign on a student’s loan). “I’m the one paying the loan, but the reason the government does this is, if I cannot pay the loan, then this monthly annuity would be paid from my dad’s income or my mother’s income,” he explains.
For his graduate degree, Gopak was able to study for free after winning a tuition scholarship in an online business challenge arranged by the private university. In addition, he took advantage of a program allowing working students to collect an allowance from the Dutch government.
Can we emulate international student loans in the US?
There’s one important thing to note about the United States’ student loan system. When President Johnson signed the Higher Education Act of 1965 (which provided financial assistance to students and has since been reauthorized and amended numerous times), fewer people pursued college degrees and tuition was much cheaper than it is today.
President 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.
In Australia, the Netherlands, and other international student loans programs for college students, taxes are a larger share of the country’s gross domestic product. Australia, Latvia, and the Netherlands also have much smaller populations than the United States.
“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,” Hutchinson says.
Mimicking international student loans in US programs could lighten the burden on borrowers, possibly leading to more home purchases and other economic benefits — but it would take a large infusion of money first to emulate programs like HELP.
Adds Hutchinson, “The economy will benefit but it would be a medium- to long-term gain if it did that.”
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