A working paper by Nicholas Barr, Bruce Chapman, Lorraine Dearden and Susan Dynarski titled, “Getting student financing right in the US: lessons from Australia and England,” was published by the Centre for Global Higher Education this month.
Abstract:
The US student loan system is currently in crisis. US graduates owe $1.3 trillion in student loans; seven million borrowers are in default and even more are in arrears. The impact on borrowers is catastrophic. We argue that this is mainly due to the fact that the US operates mortgage-type student loans: these are repaid over a set period of time, which places high repayment burdens on low earning graduates. We draw on the experience of the income-contingent loan (ICL) systems operating in England and Australia, and use US Current Population Survey (CPS) data to show how such a loan system could be implemented in the US and assess the revenue and distributional implications. We also compare repayment burdens under the two systems. The current US income-based arrangements are not income contingent for the most important subset of borrowers – those with unstable employment and income and/or hours of work. We show that US mortgage style loans (such as Stafford loans) imply extremely difficult financial circumstances for a significant minority of US loan recipients, and that a well designed ICL can solve these problems in an efficient and cost-effective way with no risk of default.