Merging Ideas on Student Loan Reform

by Daniel L. Bennett

Bruce Chapman and Yael Shavit propose an interesting reform of the student loan system in an OpEd for Inside Higher Ed this morning. They argue that the US should adopt an Australian-style system:

when students enroll in college they may elect to pay their tuition later in a way that depends on their future incomes. Eighty-five percent of students take up this option. The debt is recorded with the Australian Internal Revenue Service and is taken from a graduate’s income, at a maximum of 8 percent of incomes, but only when incomes exceed about U.S. $35,000 a year. If the former student is in poor circumstances, for example from being unemployed or in a low-paying job, no payments are required, and no action is needed by the debtor to prove these circumstances. There are no poverty line recalculations, no need to adjust repayments with marriage or separation or the birth of a child; it is all automatic and simple. When Australian college debtors’ incomes recover, their repayment amounts increase, yet never to more than 8 percent of incomes.

They suggest that the system is effective enough that other many other countries have adopted it:

New Zealand adopted a similar plan in 1991, South Africa in 1991, the UK (partially at first in 1997 and now in full swing), Hungary in 2003, and similar efforts are planned for Malaysia, Ireland and other countries in the near future. All the evidence is that these systems have worked well and the government gets back the vast majority (85 percent) of the debt without defaults or repayment hardships from low incomes.

Tying student loans to income is an interesting idea. My main concern is that it still pits the government as the central lender and puts taxpayers on the hook for potential losses, while allowing colleges to continue avoiding accountability for their outcomes and use of scarce economic resources. In a recent article for Forbes.com, I suggested that we have colleges put some skin in the game by holding them responsible (or at least sharing in the responsibility) for potential losses when student loans go sour. The ideas of shared responsibility for losses and repayment based on income could conceivably work in tandem to provide colleges with an incentive to use their resources efficiently and focus on providing value, as well as to control debt accumulation and stymie defaults and taxpayer losses.