Should the US Reform the Student Loan System?
Perhaps we should make our student loan system more Australian.
Anyone who has read my previous columns about paying for college knows that I'm a student debt hawk. Student loans in their current form are dangerous: It's too easy to borrow massive quantities; they can almost never be discharged in bankruptcy; and students and parents rarely understand what kind of quicksand they're getting into.
At the same time, a "buy now, pay later" system makes sense. We have all sorts of public subsidies for college tuition, including the federal student loan program, because having an educated population benefits everyone.
But many of the benefits of a college education-such as higher earnings and the opportunity to spend four years having inebriated pseudo-intellectual conversations with your peers-accrue to the student. So students and their families should pay something, and providing a traditional four-year degree is not cheap.
Perhaps in the future, online degrees from something like Khan Academy or iTunes U will be as sought after as Harvard diplomas. In the meantime, college costs real money-and even if online degrees become standard, there's always the opportunity cost.
If you're watching lectures and taking tests, that's time away from earning a paycheck. I'm optimistic about the potential of electronic courses, but they're not going to cram a four-year degree into one year - except for rare hotshots.
While I'm sympathetic to the idea that college should be as free as public high school, the idea is politically untenable and, let's be honest, would lead to a lot of aimless hacky-sacking.
But there is one reform well within reach that would make financial life easier and more predictable for college graduates: perhaps we should make our student loan system more Australian.
From a Land Down Under
The Australian university financing system is complicated and includes controls on tuition rates, but the key provision that the US could easily adopt is to make student loan repayment part of the tax code.
Here's how it works. Once you graduate from college in Australia and get a job, you begin repaying your student loan via paycheck withholding, exactly the same way you pay your income taxes.
The repayment scheme is highly progressive: if you make less than about $45,000, you owe nothing on your student loans. Make between $45,000 and $50,000 and you'll pay 4% of your income. Make over $91,000 and you'll pay 8%.
The repayment amount is tied to your income, not the amount of your loans. You can pay extra on your loans at any time, and you receive a bonus for doing so. Once your loans are repaid, the paycheck deduction automatically stops and your paycheck gets fatter.
This is similar to the Income-Based Repayment (IBR) plan available to federal student loan borrowers in the US. The key differences are:
- IBR is available only when you have a financial hardship. The Australian system is for everyone.
- IBR still relies on voluntary repayment.
The last point is key. We may not like it, but most of us faithfully pay our taxes on time because the IRS makes it easy. If we had to send them a check every month or every April, the rate of tax evasion and underpayment would jump enormously.