Graduate from college this year? Congratulations! If you borrowed money, you likely need to pay back more than $35,000. Just how bad is that? Well, the average American with credit-card debt owes less than half that amount. Perhaps that’s why MyBankTracker recently discovered 30 percent of those they polled would agree to sell an organ in order to pay off their student loan bills.
Good luck getting started in the world with that amount of debt—one reason why many economists believe millennials aren’t buying homes or cars at the same age their parents did.
It doesn’t have to be this way—and it isn’t in many other places. Let’s visit Australia, where politicians congratulated themselves this week for closing down what they considered a major loophole in the nation’s student loan program: scofflaws moving abroad to escape the automatic salary deductions of the nation’s income-based student loan program. “You should have to repay that debt,” thundered Simon Birmingham, the nation’s education minister.
But that’s still not true for everyone. Earn less than $54,000 Australian dollars—that’s about $38,000 in the United States—and you have no worries, at least for now and maybe not forever.
So the United States:
TIL that student loan debt hasn't automatically discharged through bankruptcy since the Ford presidency— walden pond: CLEARED (@vogon) June 8, 2015
@vogon meanwhile here in australia I havent made a single student loan payment because I dont earn money to, and theres no interest— James Jordan (@CrowMS) June 8, 2015
How could this be?
Australia offers students an income-based student loan plan, and has since 1989, when the system was set up to compensate for the fact that universities were charging tuition at all. That was a change. Higher education had been free in the 1970s and 1980s.
Today, there are two ways Aussies can choose to finance their college educations. If they pay up front, they get a 10 percent discount. Most don’t do that, however. That’s where where Australia’s income-based repayment plan comes in.
Australians borrow money from the government through the Higher Education Loan Program (or HELP—get it?) and related offshoots. When it comes time to repay the bill, the monthly amount has nothing to do with the sum borrowed. Instead, debtors earning more than AU$54,000 ($38,000) pay between 4 and 8 percent of their income, depending on how much they take home annually. Unemployment or illness? Salary falls under the minimum earnings required for repayment? No worries. Payments temporarily cease, with no interest or penalties accruing to the borrower.
Moreover, unlike in the United States, where students need to make strategic decisions whether to consolidate their loans at a particular interest rate because they will not get a do-over, there’s no such issue in Australia. The interest rate is set by the consumer price Index—that is, the rate of inflation.
Finally, making payments is easy. It’s an automatic deduction, courtesy of the Australian Taxation Office. (This is how the expat loophole developed.) And, yes, a borrower can repay the loan early, if he or she so desires.
Another great thing? Unlike certain American politicians (Hi Marco Rubio!), Australian pols don’t complain about the number of philosophy majors running up debt they can’t pay off. If a student attends a public university in Australia—something the vast majority do—tuition is set, in part, by the course of study. The greater the expected lifetime income return, the greater the cost. So a degree in the humanities costs less than a degree in education, which costs less than a medical education.
I don’t mean to make this sound like nirvana. Australians are increasingly worried about the amount of student-related debt, which is growing rapidly. (One estimate has it surging from AU$50.3 billion this year to AU$70.4 billion in 2018.) That means students will owe more money, likely paying it off over a longer period of time. There is also concern over what those down under like to call “doubtful” debt—estimates are that 20 percent of students will never be flush enough to repay their loans, leaving taxpayers on the hook.
There are other costs associated with the program as well. The government borrows money on the open market at a higher rate of interest than the inflation rate. As a result, there have been proposals to change the interest rate benchmark to Australia’s 10-year treasury note, but so far that hasn’t come to pass.
Australians also have the equivalent of our for-profit college problem. Like, say, the late Corinthian Colleges, a number of the private vocational programs in Australia aggressively recruit nontraditional students, offer them less-than-adequate educations, and then stick them with the bill. Earlier this year, the University of Sydney’s Honi Soit reported representatives for one such program were cold-calling potential recruits. “On the phone, the lady went on to devalue bachelor degrees and stated it was better to have lots of certificates and diplomas as it’s what employers look for,” one recipient recalled.
Nonetheless, income-based repayment plans remain popular, so much so that the opposition Labor Party recently announced that if it were elected to power, it would push a plan to offer students a new line of credit, one designed to encourage recent graduates to pursue entrepreneurial initiatives. The party calls it a “start-up year.”
The U.S. Department of Education does offer students income-based loan programs, for which borrowers need apply. And that’s proved a problem. The U.S. Government Accountability Office recently found that the Department of Education has “not consistently notified borrowers who have entered repayment about the plans.” In addition, the interest rate the United States charges is higher. One thing we do here the Australians don’t: We forgive the debt if it’s not repaid after a period of time—most often 20 or 25 years, depending on the plan. But, then again, you'll potentially pay taxes on the amount forgiven. Those working in public service can have their loan forgiven after 10 years, with no tax penalty.*
Here in the United States, we have a politician saying more young people should consider entering a welding program over studying philosophy, and almost everyone from Barack Obama on down says students should consider their future salaries when choosing schools, at least implicitly. Bernie Sanders is considered an impractical dreamer for promoting tuition-free higher education. Meanwhile, Australians support a financing system designed to encourage students to attend college and plan for a future that best suits them first and foremost. Imagine that.
This is part of an occasional series in the Bills on innovative ways other countries handle common dilemmas and issues in personal finance.
Update, Nov. 13, 2015: This paragraph was added after publication to clarify that the U.S. does offer income-based loan programs.