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Lessons from Abroad: Student Loans

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America was the first country in the world to create a truly mass higher education system, and because of its status as a trailblazer it has rarely seemed fruitful to look to other countries for inspiration. But the problems in American higher education are now sufficiently grave that a dose of inspiration from abroad wouldn’t go amiss. Not because there are any magic bullets out there, but because other nations’ choices can make the biases and weaknesses of one’s own policy decisions somewhat more clear.

One area where other countries have had more success than the US is in finding ways to make life easier for borrowers in repayment who have low or unsteady income. Now, borrowers in the US have had access to one or more income-contingent loan programs for over 20 years. The ICR repayment option – which is available to all borrowers – has been available since the mid-90s, while the newer Pay as You Earn (PAYE) and Income-Based repayment (IBR) systems available only to borrowers in some degree of distress were introduced by the current administration. But for some reason, all these programs suffer from low take-up rates, meaning that some students who are eligible for these programs are not accessing them, in part because of the complication of the application system and the need to prove income levels.

This particular problem does not occur in most countries with income-contingent loans for a very simple reason; students don’t get to choose their repayment option. They enroll them in a single program (simplicity is a virtue) and then – crucially – turn the collection of loans over to the tax authorities, which administer it through deduction-at-source programs. When borrowers’ income drops below a certain threshold, the relief is therefore automatic – no applications, no income-verification, nothing.  Employers just stop deducting your loan payments. To the extent that borrowers stop falling through the cracks and receiving all the benefits to which they are entitled, it’s as foolproof as system as could be devised.

This is obviously somewhat easier to do in places like the United Kingdom, where borrowers pay a flat 9% of income above £21,000 ($33,600 USD) per year or New Zealand, where you pay 12% of any income over $367 ($285 USD) per week, than it would be in America. The US system is more complicated (mortgage-style monthly installments if income is high, a percentage of income if it is low) but this is not an insurmountable problem at a technical level. The bigger issue is that the IRS is leery about administering collection for what were then private (albeit guaranteed) loans. Back in the Clinton administration, when income-contingent loans were first introduced, the IRS rejected the idea on the grounds that it would compromise tax morale (this is tax jargon for “the likelihood that people will voluntarily fill out their taxes”, which is a cornerstone of most national tax systems). One study in Australia did show that running their income-contingent system through the loan system did have an effect on morale, but it was so small that no one questioned the overall benefit of the loan collection system. And with US loans now having switched from guaranteed to direct, there’s even less reason for the IRS to support the idea.

Now, admittedly, getting Americans to believe that involving the IRS in student loans might be a bit of a sell. But even if those benefits are unavailable, there are still some lessons that America can learn from other countries. And the most obvious place to look for lessons on dealing with rising student debt is Canada.

Much as America is going through a perceived student loan crisis right now, Canada went through one in the mid-1990s. The economy was a disaster (unemployment reached 11% in 1991 and didn’t drop below 8% for seven years), tuition was rising at 7% a year, and many grant programs were being turned into loan programs in order to save money. The result was a rapid rise in student debt loads; by 2000, roughly half the student population was leaving their undergraduate program with debt and the average among those with debt was about $25,000 in today’s dollars. Canada, in other words, has been dealing with high student debt for much longer than the US, and has learned a few things along the way.

The approach Canada took to deal with this problem was, basically:

1)      Tougher enforcement of quality standards.  Canada’s degree-level standards have always been strict enough to keep out the 4-year for-profits, but rules were tightened in a number of ways which made it tougher for low-quality 1 and 2-year for-profits to operate.  That kept borrowing and defaults down.

2)      A small shift back away from loans towards grants.  Not a big shift – just enough to keep debt from increasing faster than inflation.

3)      A lot of targeted help for borrowers in repayment.  Canada’s Repayment Assistance Program (RAP) looks a lot like Americans’ IBR/PAYE, but with one major difference – it not only suspends interest payments but actually forgives them, meaning that that recipients aren’t stuck with larger interest payments down the road.

The result of these three policies has been to keep borrowers afloat during difficult times even with high average debt loads. But notice what Canada didn’t do: it didn’t touch student loan interest rates, which were slightly higher than those in the US. If students find their payments too high, they get help through RAP. If not, they pay their full share – no need to give them a subsidy.  And, crucially, it let the economy do most of the work. In time, unemployment faded, graduate prospects improved and debt became more manageable (lower taxes and lower interest rates have also made debt repayment more affordable). Which is another way of saying that student debt problems are more about the ability to manage debt than about absolute amounts incurred.

And that’s a good lesson for everyone to keep in mind.

 

Alex

About The Author

Alex Usher

Alex Usher is President of Higher Education Strategy Associates in Toronto.  His work on student financial aid, education finance, program evaluation and quality measurement in higher education spans all six continents.  He writes a daily blog on higher education called One Thought to Start Your Day (www.higheredstrategy.com/blog).