SYDNEY — When it came time for Morgan Sills to pay for college, he filled out a simple form and barely gave it another thought.
Sills’s tuition, like that of almost all Australian students, is covered by a loan-like subsidy he doesn’t have to pay back until his future earnings reach a comfortable level, when it will be withheld as a fraction of his wages.
If he doesn’t have a job or isn’t making any money, he’ll contribute nothing. If his salary is low, he’ll pay the smallest possible percentage of it.
“It’s one little box you tick, and then it comes out like a tax,” Sills said with a shrug as he crossed the sprawling campus of the University of New South Wales, from which he’ll graduate next year with a degree in construction management.
So Sills, who said he talks about this with friends he’s made from among the many U.S. students who come here, said he seldom worries about the cost of college, or this future debt.
“Not as much as I would as an American,” he said.
Now students in the United States with many kinds of government-backed loans are being encouraged to take advantage of a similar option, limiting their repayments based on what they earn, instead of facing a fixed monthly balance beginning six months after graduating that they’re stuck with whether or not they have a job.
Other countries also charge their students for their higher educations as a portion of their later incomes, including Hungary, New Zealand, England, Wales, South Africa, and South Korea. But none has done it longer than Australia. And its experience illustrates the benefits and some drawbacks of the idea as the U.S. variation of the concept builds up steam — and the comparative shortcomings of the new American take on it.
For one thing, there are no fewer than four different versions in the United States of what’s become known as income-based or income-contingent repayment — five, if you count a revision of one of these that was added in December — which, like much about the American financial-aid process, are so complicated that one Australian economist said he and a doctoral student, as an experiment, tried in vain for days to fill out the applications.
How confusing are these rules? Borrowers of direct student loans whose discretionary incomes reach one and a half times the poverty level for their family size pay between 10 percent of their income above that threshold and the lesser of 20 percent or the fixed repayments they would have been charged over 12 years times their “income percentage factor.” If that’s not hard enough to follow, people who took out loans before July 1, 2014, under one plan pay 15 percent of what they make; those who signed up after that date, 10 percent.
The American system needs “urgently” to be streamlined, said Lauren Asher, president of the Oakland, California-based independent advocacy group The Institute for Access and Success, or TICAS.
Income-based repayment in the United States is also optional, not automatic. But while a form of it has been on the books since 1994 — and despite rising default rates and national anger about the more than trillion-dollar collective student debt — it’s been implemented with excruciating slowness. The biggest expansion of it, for example, was approved in September of 2007 but wasn’t extended to borrowers until almost two years later.
The U.S. Department of Education then did such a poor job of notifying students about this, according to the Government Accountability Office, that while more than half of people who take out federal direct student loans qualify for income-based repayment, only 19 percent, or just over four million, have signed on. Fewer than 6 percent of people who get student loans from private lenders are enrolled, also because the plans — which can be applied retroactively to existing loans — are not promoted or explained, the Consumer Financial Protection Bureau found.
“There were several years in which there was no outreach at all,” said Asher. “The first problem was that nobody knew about it.”
Those numbers have begun to pick up. But in Australia, there’s just one plan, almost universally used, with one set of instructions, and one simple box to tick off.
The American system “is so damned complicated,” said Bruce Chapman, the Australian economist credited with devising what was originally known here as HECS, or the Higher Education Contribution Scheme. Today it’s part of what’s called the Higher Education Loan Program, or HELP, though most people still refer to it as HECS.
Now a professor at the Australian National University, it was Chapman who, with a doctoral student, tried to fill out applications for the U.S. income-based repayment plans. “We thought, let’s see how hard it is to apply,” he said. “We both came back four days later and we couldn’t do it.”
Both systems do share one thing: a goal of protecting students from defaulting if they don’t earn enough to pay their debts. Graduates get a reprieve from their bills if they get sick, lose their jobs, or face other setbacks that interrupt their incomes; if their earnings never reach a given threshold, or if they leave the workforce to raise children.
The most noticeable impact of this in Australia? Unlike their American counterparts, most Australian students and their families don’t obsess about the cost of college.
“I don’t even think about it,” said one, Stelina Drimousis, who studies pharmacology at the University of New South Wales. “It will be years before I have to even think about paying that off,” echoed Kataya Barrett, a marine biology major. “We don’t have to worry that we have this enormous debt like American students do.” Even if he did fret about that, reasoned Josh Kirby, a high school student who had come to the campus of the University of Melbourne to cram for the regional equivalent of the SATs, “If I don’t do it, then I don’t go to university and I don’t make any money.”
This relative lack of anxiety results from the fact that students in Australia know “if you graduate from university and end up in a job in McDonald’s, you’re not having to pay your degree back straightaway,” said Sinead Colee, president of the National Union of Students.
By comparison, debt haunts many U.S. students and their parents, in the words of Kathleen Gurney, a psychologist who studies this. “People feel like they’re captive to their loans, that there’s no way out,” she said.
That’s the difference between Australian students and American ones, said Gurney, who travels often in Australia and is author of Your Money Personality: What It Is and How You Can Profit from It. “The Australian student, why would they be stressed? Their payments will be no more than they can afford. It’s like a safety valve. It eliminates that feeling of doom, versus, ‘Oh my god, what did I just do, and what did I do to my family?’”
Low-income students in particular, who research shows are generally reluctant to take out conventional loans, said Chapman, are more willing to borrow when they know their monthly obligations won’t exceed what they can afford to repay.
While they’re still less likely to enroll in college than wealthier Australians — about 16 percent of college students in Australia come from the bottom quarter of the income scale — their numbers have stayed steady since 1989. That’s when tuition started to be charged here for higher education, which had previously been free, and when HECS was set up to help students pay for it.
Advocates see this as proof of the system’s effectiveness. (On the other hand, one in three low-income students drop out of college once they get there, a problem studies blame less on financial problems than on comparatively poor preparation in the lower grades and less guidance available from family members to help them navigate the higher-education bureaucracy.)
The closest comparison with the United States is that 15 percent of students at the priciest elite, four-year universities and colleges are low-income, 28 percent at cheaper flagship publics, 42 percent at even less expensive community colleges, and 66 percent at private, for-profit institutions.
“It’s perfectly reasonable that if you’re poor and your parents are poor, debt seems like a bad idea,” Chapman said. “And one reason it’s a bad idea is that there’s no one to help you out if you default. These debts are not like that. You don’t pay anything if you don’t have the money.”
It’s almost impossible to default on a college debt in Australia. In the United States, by comparison, the proportion of student borrowers at least 30 days behind in their repayments has reached one in three, the Federal Reserve Bank of St. Louis calculates.
That’s up from 11 percent a decade ago and is higher than for any other type of debt, including credit cards, auto loans, and mortgages.
Income-based repayment is designed to minimize this prospect.
Before it was available, “you were basically presented with these contradictory arguments: Go to college, and don’t worry about the loans because you’ll earn so much money. At the same time you’d be told, don’t borrow too much, because if you can’t pay it back, your life will be ruined forever,” said Asher, of TICAS. “Income-based repayment is a way to help contain what were otherwise unlimited risks of borrowing.”
In Australia, graduates don’t have to start making payments for their college educations until they reach a salary that’s the equivalent of $39,152, or roughly $20,000 less than the average income here, at which point they’re charged 4 percent of their total earnings. That increases gradually to a maximum of 8 percent for people making the equivalent of $79,945 or more. There also isn’t any interest; the balance rises only at the same rate as inflation. Australia’s inflation rate last year was less than 2 percent.
In most of the American plans, income-based repayments typically kick in at $17,820 for an individual — and take more than double the proportion of the paycheck, or a minimum of 10 percent (and, under some plans, 15 percent or 20 percent) of anything above that. And “income” is determined under some plans based on the earnings not just of the original borrower — as in Australia — but also, for couples who file their income taxes jointly, his or her spouse.
Even under income-based repayments, American borrowers are responsible for the interest on their loans. The interest also compounds, meaning graduates could end up paying more over the life of the loans than under a conventional repayment. A borrower with $29,400 in debt and a starting salary of $35,000 a year would pay 26 percent more under income-based repayment, when adjusted for inflation, than under the standard 10-year repayment plan, TICAS estimates.
One of the most controversial kinds of U.S. federal loans also doesn’t qualify for income-based repayment: ParentPLUS loans, which let parents borrow toward their children’s educations, and which have high fixed interest rates and monthly balances.
A few U.S. policymakers have called for the American system to move closer to the Australian one. Before he dropped his campaign for the Republican presidential nomination, for example, Jeb Bush pushed the idea of $50,000 lines of credit being made available to high school graduates for various education costs, to be repaid alongside their federal taxes as a portion of their future incomes.
There’s one advantage to the American approach over the Australian one: In the United States, after 20 to 25 years of income-based repayments — depending on the plan — any remaining balance is forgiven. But then it’s taxed as income. That is a quirk the Obama administration tried and failed last year to fix in its budget deal with Congress.
In Australia, repayments don’t stop until the original debt has been recouped. One calculation found that a student with a typical college debt would have to earn an average of more than the equivalent of $57,817 a year to pay it off before retiring. There was even a proposal, which was quickly dropped, to make the estates of people liable for the remaining balance after they die.
That’s because of a growing worry about income-based repayment — and a caution the Australian experience can offer the American one: By its nature, it loses money.
About $53 billion is expected to be loaned to Australian students by the government this year under the program, and about 17 percent will ultimately go uncollected, according to the Grattan Institute, an Australian think tank. This is known here by the Harry Potter-esque euphemism “doubtful debt.” The expected write-off in the U.K. is an even higher 45 percent.
There’s also concern that making debt less painful by tying it to income takes pressure off of universities and colleges to control their costs. In Australia, tuition is capped by the government — and it varies by institution and major — but there’s talk of deregulating it.
As it stands, a “huge proportion” of Australian students are so comfortable with the income-based repayment system, “they don’t have any idea what their degree is going to cost,” said Colee, the president of the student union here, which favors eliminating tuition altogether.
One lesson from the annals of American financial aid now being learned by the Australians: When a variation on HECS was extended to the 3,700 private, for-profit vocational colleges and training programs here, a parliamentary investigation found, some used methods such as offering free laptops to get students to enroll and sign over their government funding—then put them into courses for which they weren’t qualified, and that they never finished. Similar charges have been levied against American for-profit providers, several of which have closed, leaving borrowers and taxpayers holding the bag.
But these kinds of costs are largely outweighed by the benefits of protecting students and the economy from unmanageable debt, said Chapman.
Instead, he said, Australian students know they have little reason to fear the kinds of financial entanglements increasingly snagging American ones.
“Why would you worry?” Chapman said. “If you don’t have any money or you’ve lost your job or you take time off or you’re sick, there’s no issue with a student loan. It’s just not there.”
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