How Australia Gets Student Loans Right

Graduates don’t have to start making payments for their college educations until they reach a salary equivalent to $39,152—and they pay no interest.

University of Melbourne (Geoff Penaluna / Flickr)

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 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.

“It’s one little box you tick, and then it comes out like a tax,” said Sills, who will graduate from the University of New South Wales next year with a degree in construction management.

Sills, who talks about this with friends he’s made from the U.S., said he seldom worries about the cost of college, or his future debt: “Not as much as I would as an American.”

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, South Korea, and now, the United States—where many kinds of government-backed loans are now also being encouraged to take advantage of a similar option.

But none has used this income-based repayment system longer than Australia—and comparing it to the U.S. approach, including both successes and weaknesses, could be informative.

In Australia, graduates don’t have to start making payments for their college educations until they reach a salary equivalent to $39,152, at which point they’re charged 4 percent of their total earnings. That increases gradually to a maximum of 8 percent for people making $79,945 or more. There also isn’t any interest; the balance rises only at the same rate as inflation, which was less than 2 percent last year.

By contrast, in most of the American plans, income-based repayments typically kick in at $17,820—and take a minimum of 10 percent (and, under some plans, 15 percent or 20 percent) of anything above that. American borrowers are also responsible for the interest on their loans, which also compounds, meaning graduates could end up paying more over the life of the loans than under a conventional repayment.

Morgan Sills (Fiona Morris / The Hechinger Report)

While it’s almost impossible to default on a college debt in Australia, in the U.S., 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.

The Australian system is also simple to sign up for: There’s just one repayment plan, almost universally used, with one set of instructions, and one box to tick off. In the U.S., there are no fewer than four different repayment plans—and like many aspects of the American financial-aid process, the rules for application are prohibitively complicated. One Australian economist, Bruce Chapman, said he and a doctoral student tried to fill out applications for the U.S. income-based repayment plans as an experiment. “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.”

The American system “is so damned complicated,” said Chapman, now a professor at the Australian National University, who is credited with devising what was originally known as HECS, or the Higher Education Contribution Scheme, in 1989. That’s when Australia began charging tuition for its higher education, which used to be free to all citizens.

Lauren Asher, the president of the Oakland, California-based independent advocacy group The Institute for Access and Success (TICAS), says that the American system needs “urgently” to be streamlined.

While a form of income-based repayment has been on the books in the U.S. since 1994, it’s been implemented with excruciating slowness—despite rising default rates and national anger about the more than trillion-dollar collective student debt. The biggest expansion of the policy was approved in September of 2007 but wasn’t extended to borrowers until almost two years later.

The U.S. Department of Education did such a poor job of notifying students about the new repayment options, 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 4 million, have signed up. 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.

“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 will likely remain low until income-based repayment in the United States becomes automatic, like in Australia, rather than optional.

One of the most noticeable beneficial effects of the Australian loan-repayment system is that unlike their American counterparts, most Australian students and their families don’t obsess about the cost of college.

Stelina Drimousis (Fiona Morris / The Hechinger Report)

“I don’t even think about it,” said 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, the 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. 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 the income-based repayment system was set up in 1989.

Advocates see these stable levels of low-income student enrollment as proof of their repayment system’s effectiveness—and attribute other trends, like that fact that one in three low-income students drop out of college once they get there, less on financial problems than on comparatively poor preparation in the lower grades and less guidance available from family members. In the United States, 15 percent of students at the priciest elite, four-year universities and colleges are low-income; as are 28 percent at cheaper flagship publics, 42 percent at even less-expensive community colleges, and 66 percent at private, for-profit institutions.

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.

But there’s one advantage to the American approach over the Australian one: In the U.S., after 20 to 25 years of income-based repayments—depending on the plan—any remaining balance is forgiven, and is taxed as income. 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—often known by the 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 Australian student union, which favors eliminating tuition altogether.

Australians have also been learning from America’s financial-aid system when it comes to potential abuse by for-profit colleges: When a variation on HECS was extended to the 3,700 private, for-profit vocational colleges and training programs in Australia, a parliamentary investigation found that some used methods such as offering free laptops to get students to enroll and sign over their government funding. This the put students into courses for which they weren’t qualified, and that they never finished.

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.”

This story was produced in collaboration with The Hechinger Report.