If you’re a regular reader of my blog, then I might sound like a bit of a broken record when I say that student loan reform is going to happen. Well, it is.
First of all, there is widespread, bipartisan agreement that our current system is flawed and unsustainable. Furthermore, the U.S. Dept. of Education will soon be selecting (or renewing) contracts for federal student loan servicing and debt collection, two areas that need some major industry-wide changes. Moreover, even now, the U.S. Dept. of Education is in the process of creating new regulations governing loan forgiveness and for-profit schools. And finally, the Higher Education Act (HEA), which is the statute that governs much of the federal student loan system, is up for reauthorization; the process of reauthorizing the HEA has historically been a vehicle for making big changes to the overall federal aid system.
Reform is happening. But what is that reform ultimately going to look like?
There are a lot of proposals out there from presidential candidates, lawmakers, think tanks, advocacy and policy organizations, and many other stakeholders. There are proposals for free public postsecondary education. There are calls to allow borrowers to refinance their student loans at lower interest rates. There are proposals to streamline income-driven repayment plans by combining several confusing plans into one and creating a system of automatic payments through payroll deductions or the IRS tax filing system. There are ideas to better “target” safety net programs like loan forgiveness and discharges (which could mean a variety of things).
If only there was an existing blueprint of a student loan system that generally works, or at least works better than what we have now…
Actually, there is! America, meet Australia. Australia, meet America. Australia has a student loan financing system similar to our’s, but it just seems to work a whole lot better, is fairer and easier to navigate, and according to a recent article in The Atlantic, people seem pretty laid back about it. Here are some highlights of the Australian student loan system:
- Fairer income-driven payments. Rather than having payments calculated as a rather hefty percentage of gross taxable income above a modest poverty exemption (10%-20%, depending on the plan you are eligible for), in Australia monthly payments are $0 until you make around $39,000 per year; then payments are only about 4% of total earnings until you make around $80,000 per year. Above that level of income, payments are capped at 8%. Bottom line: Australia’s highest level of income-driven repayment is cheaper than the most generous plan offered in America.
- Streamlined payments, no annual re-certification. In America, if you’re on an income-driven plan, you have to “re-certify” your income every 12 months so your monthly payment can be re-evaluated and recalculated. If you fail to re-certify on time, you’re kicked out of the program. But all too often, servicers make mistakes and cause delays. In contrast, income-driven repayment in Australia is essentially treated as a payroll tax. It comes out of your paycheck automatically – no annual recertification is required, since your payment amount will automatically change with your income. That saves borrowers time on the phone with their servicers, and saves taxpayers money on bureaucracy and servicing contracts.
- No interest. If you have student loans, then you know all about interest. Right now, new federal student loan interest rates range from 4.3% to 6.8% depending on your type of loan, but federal student loan interest rates can be as high as 9% or 10%. Private student loan interest rates are even higher. In Australia? There is no interest. No interest! Balances are simply tied to inflation and increase accordingly (inflation in Australia was less than 2% in 2015).
- No job? No payments, no worries. In our current student loan system, if you lose your job, your payments don’t stop unless you contact your loan servicer and request a deferment or forbearance. And those deferments and forbearances are not unlimited – once you use up your allotted amount, it’s gone. Furthermore, interest still accrues on your student loans while your payments are postponed, so you may wind up paying more later as your balance steadily increases. None of this is true in Australia. Because of their automatic payroll deduction system, you’d never need to request a deferment or forbearance if you lose your job – if you don’t have a job, you don’t have a paycheck, and so there’s no student loan deduction. And since there’s no interest, you don’t have to worry about your balance rapidly increasing.
- Few defaults. Federal student loan default in the United States is incredibly destructive to people’s lives – it leads to exorbitant penalties and fees, damaged credit, brutal wage garnishment, and a loss of social safety net programs like Social Security and the Earned Income Tax Credit. Then there are the secondary consequences of default which can include loss of housing, employment, and professional licensure. In Australia, it’s actually quite difficult to default on your student loans because either you’re working and earning above the minimum income threshold (in which case you’re making automatic payments tied to your income), or you’re not, in which case you’re not making any payments at all (and that’s okay).
The system isn’t perfect – Australia has adopted tougher measures to recover student loan payments from borrowers who move abroad, and the country has also proposed legislation to attach estate assets from deceased borrowers who owe large balances. The costs of Australian universities are rising (but arguably it’s not as expensive as higher education in America).
That said, I’m sure many of you can imagine how much easier it would be to manage your student debt if you didn’t have to deal with overwhelming payments, an inept bureaucracy, draconian collection powers, and loan balances that seem impossible to ever pay down. We can’t simply copy Australia’s system and expect it to magically fix the student debt crisis. But perhaps we can look to it for some inspiration — and for some healthy degree of hope.