What the U.S. Can Learn From Student Loans in Different Countries

 August 15, 2019
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Student Loans in Different Countries

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As the election season spurs discussion of America’s student loan crisis, we might look beyond our politicians for answers. Instead, we could look at the handling of student loans in different countries, especially student loans in Europe and some of the Commonwealth nations.

For instance, did you know that borrowers in Canada and England don’t begin repaying their education debt until they’re earning a substantial income? Or that Germany and Sweden don’t charge college tuition in the first place?

Putting aside for now the free-college-for-all and mass-forgiveness proposals of some U.S. presidential candidates, let’s review what our country could consider adopting from systems in other countries.

1. No (or low) tuition for a college degree

Finland, Germany, Scotland and Sweden are among the places that don’t charge college tuition, regardless of whether you’re a resident or international student.

But that doesn’t mean student loans are obsolete there: Germans, for example, make debt available for students attending private universities. Swedes, meanwhile, still take out education debt for off-campus expenses. Still, lower costs generally equate to lower rates of borrowing.

Even in places where there’s an actual cost of attendance, like Italy and France, fees are relatively low, lessening the need for taking on debt.

America’s answer: There is no such blanket coverage for U.S. students, but the Education Department does offer the Federal Pell Grant program. When combined with state grants, as well as private and school-issued scholarships — a Pell Grant keeps fees low, at least for low-income students.

Free college does exist in limited form, depending on where you aim to attend. New York, for example, became the first state to offer free in-state college options for families below a given income level — plus, individual schools (including Harvard) are tuition-free for select students.

2. Tie school tuition costs to a student’s projected earnings

Australia is often held in high regard internationally for its approach to loan repayment. But the country also employs a novel approach to pricing college in the first place.

Student loans in Australia are less necessary because schools down under charge a tuition rate depending on the income students could expect to earn after completing their particular degrees. A business major, for example, could anticipate paying more than someone studying art history.

Some courses of study are also likelier than others to make students eligible for non-loan government subsidies.

America’s answer: Although not offered by the Department of Education, income-share agreements (ISAs) are slowly gaining popularity. With such arrangements, students agree to pay a percentage of their future income in exchange for partial or full tuition funding. Purdue University in Indiana is among the schools offering ISAs to students. Unfortunately, however, not all careers are good fits for ISAs, and the model has drawn some criticism recently.

3. Delay repayment until the borrower earns enough income

In many countries, students who leave school with debt don’t begin repaying that debt until they earn sufficient income. And even then, the borrower’s monthly dues are capped as a percentage of their earnings.

Consider the following countries, where borrowers only submit payments if they have a minimum income:

Country Minimum annual income Maximum payment Payment method Forgiveness of remaining balance
Australia $31,010 (for 2019-20) 1% to 10% of income Tax deduction None
Canada $18,836 20% of income Manual After 15 years
England $22,381 9% of income Payroll deduction After 25 years

Based on currency conversion rates for Aug. 6, 2019.

Borrowers are often automatically enrolled in these repayment plans, so unlike in the U.S., they don’t have to worry about red tape when facing economic hardship.

America’s answer: In the U.S., federal loan repayment kicks in at the end of a student’s six-month grace period. Stateside students can enroll in an income-driven repayment plan (IDR) and possibly qualify for a $0 payment, but only after the filing the necessary paperwork. They’d also need to recertify their eligibility for the plan with their loan servicer each year.

Borrowers in America could also complete an application for an Unemployment Deferment, postponing payments for up to three years. Unfortunately, this method would cause interest to accrue on the balance of their student debt, except for Direct subsidized loans.

Improving America’s system by considering student loans in different countries

With a collective outstanding U.S. student loan debt of $1.56 trillion, those on both sides of the aisle — and kitchen table — might agree that something should be done to help.

Examining the approach to student loans in different countries is a great way to find inspiration for our own student loan reform. A good starting point might be considering the cost of college by country. When tuition is lower, the thinking goes, borrowing should be too.

The solutions to America’s student loan debt problem, however, will need to address the pain points that are specific to our country. After all, the nations above all have much smaller populations than the U.S. does, and according to the World Bank, they also have less income inequality. At the end of the day, solutions to student debt will need to adapt other countries’ tactics to create something that will work here at home.