The Brookings Institution recently suggested that the United States should look at Australia's student loan repayment policy.
For many policymakers and activists, Australia’s student loan policy, income-driven repayment, looked like the perfect model for reforming the student loan crisis. However, according to a paper from the Brookings Institution, the recent changes that Australia made to its income-driven loan program are especially noteworthy and should be considered.
About 10 years ago, the U.S. began offering income-driven repayment plans after taking a note from Australia’s handbook. The U.S. program was more limited. Initially, the program was estimated to cost $180 million per year.
The benefits increased significantly during the Obama Administration. For instance, many borrowers saw their payments decrease by one-third. And borrowers were offered forgiveness after 20 years of loan payments. However, the program now costs the federal government $11.5 billion per year.
This increase prompted many lawmakers to propose reforms; both the House and the Senate are currently working on reauthorizing the Higher Education Act. At any rate, the IDR program is controversial, especially for taxpayers.
Australia’s loan program began in 1989 as a counterpart to charging tuition at its public universities with updates made along the way. The program calculates borrower payments based on income; in fact, borrowers don’t have to begin making payments at all until their income reaches a certain threshold.
Then, they begin making payments based on a percentage of their total income. As a borrower’s salary continues to increase their payments increase as well. And unlike the U.S., loan forgiveness isn’t an option.
Australia’s previous version of the loan program was successful for several reasons. First, graduates tended to earn good money right out of school, so they started paying off their loans more quickly.
Australia also used more discretion when giving out loans, albeit unintentionally. The Australian government capped the number of university spots so the admissions process was very competitive. Students who earned a spot were more likely to graduate and get full-time jobs. And loans were only offered to students pursuing a bachelor’s degree or higher.
In 2009, Australia made two significant changes to its student loan policy. It removed the university caps, fearing the country wasn’t graduating enough students. And students attending vocational schools were allowed to apply for loans.
As a result, the number of borrowers increased dramatically. More students were entering university but many dropped out before finishing their degree. Vocational students, who earned much less after graduation, usually didn’t earn enough to begin repaying their loans right away.
Recognizing its mistake, Australia recently made changes to its loan program once again. It reduced the income threshold from the equivalent of $36,850 to $29,683 USD to make borrowers eligible for repayment sooner. And it changed the income brackets so the payments increase more slowly over time. The government also put stricter standards on vocational schools and lowered the loan limits for students.
These changes could serve as a model to U.S. policymakers as they attempt to reign in the high costs of student loan programs. The Brookings Institute paper concluded that these changes are necessary “…to save this important program from sinking under its own weight.”