More than 40 million people in the United States collectively owe upwards of $1 trillion in student loan debt.
Those types of statistics constantly have researchers, policymakers, and higher education leaders looking for answers about how to curb the increase in student loan debt, what factors led to the increase, and whether there’s a better way to help ease the financial burden for today’s students. A panel of experts from across the globe gathered in Washington, DC, on Monday and suggested that there’s a lot the United States could learn from student loan systems in other countries, such as England, Germany, Sweden, and Australia.
During a conference hosted by the University of Michigan’s Education Policy Initiative, experts shared the successes and failures of the student loan systems in their countries, and offered suggestions for how the United States could make reforms. A panel of speakers from the United States then discussed how certain reforms – such as a universal, automatic income-contingent student loan system – would play out in American higher education.
All of the international experts, with the exception of Sweden, emphasized the importance of income-contingent repayment plans.
Nicholas Barr, a professor of public economics at the London School of Economics, and Lorraine Dearden, a professor of economics and social statistics at University College London, described the student loan system in England. The system is income-contingent, and student loan balances are forgiven after a set period of time, similar to some income-driven plans in the United States. Also similar to U.S.-based income-driven repayment plans, if borrowers earn more, they pay more on their loans, but if they have low wages or are unemployed, they pay less, or nothing at all.
“The primary purpose of student loans,” Barr said, “is consumption smoothing.”
A well-designed income-contingent loan system, Barr said, would provide insurance against low current earnings – by lowering or eliminating payments if a person becomes unemployed, for example – and protects borrowers from low lifetime earnings by forgiving the debt after a certain amount of time.
The fact that income-contingent systems are based on current income (rather than past income, as in the United States) and are automatically deducted from borrowers’ paychecks in other countries also helps protect against loan defaulting – a problem that has been highlighted in the United States, particularly among low-income graduates, or college dropouts. Many borrowers in America are deterred from enrolling in income-driven repayment plans because of the heavy amount of paperwork and the need to recertify each year, while others simply do not understand the options available to them and stay in a standard 10-year repayment plan.
“Income-contingent loans work, and they’re really good at the bottom of the income distribution,” Dearden said. “How that transpires in the U.S. system is really high default rates for dropouts and those earning low amounts of money.”
Above all, income-contingent plans provide insurance for borrowers, according to Bruce Chapman, director, policy impact at the Australian National University’s Crawford School of Public Policy.
“Some people never pay at all, because they will never earn enough money,” not because they are trying to game the system, Chapman said.
Christina Forsberg, acting director general of CSN in Sweden, presented another alternative. Student loan payments in Sweden are fixed for a set amount of time, and a lower interest rate helps reduce the monthly payments. In an income-contingent system, the interest rate does not affect the monthly payment amount, but rather the duration of the loan.
“Our mission is about fulfilling dreams for people in general by offering them student loans,” Forsberg said. “The dream of getting more skilled to get a job, the dream of being economically independent.”
In Sweden, tuition is free, so students borrow for living expenses, Forsberg said. Because every individual has the opportunity to attend college, she said, the cost to taxpayers “is quite high,” but the positive effect is that a high number of people go on to higher education.
Still, there would be some kinks to work out if the United States adopted a universal income-contingent student loan system. For one, there would need to be caps in place – either on tuition or loan amounts, or both. Dearden pointed out in her presentation that with income-contingent loans, there is no risk to colleges and universities for charging higher tuitions.
“We don’t seem to have the political will for that,” said Susan Dynarski, a professor of public policy, education, and economics at the University of Michigan. “So barring that, we need to have caps on borrowing.”
Publication Date: 6/15/2016