Loyola University, ca. 1966. A freshman studies physics on a National Defense Student Loan - and doesn't have to be distracted by the prospect of future debt bondage.
One of the biggest shocks for today's American college students, even those who are the beneficiaries of scholarships, is the total cost of living on - or off- campus. According to a recent NY Times piece (Aug. 5) estimation utilities like 'College Scorecard', often churn out financial figures that are too low and don't take into account all costs, including room & board, textbooks, even entertainment.
As The Times piece notes, while low projections can be boons to many colleges and make it appear they are really much more affordable than they are, they do a great disservice to millions of students. The latter soon discover to their horror their living costs are a lot higher than they can afford, and are forced to drop out. This according to Sarah Goldrick Rab a Temple University Professor and founder of Wisconsin Hope Lab.
Even students that don't drop out may find out they need to apply for much larger loans and end up leaving college with humongous debt. Some even find themselves in a poor employment situation and end up defaulting on their loans. But one must ask: Is it inevitable that U.S. college students be saddled with huge, compromising debt? Is there no another way?
Let's assume students can use utilities or sources (e.g. the HOPE study) to finally get accurate estimates of total college costs. The question then becomes how can they best discharge their college loan obligations without ending up penurious or forever living in mom and dad's basement?
One answer might be from the Australian college loan model, which actually was introduced in an earlier NY Times piece 'America Can Fix Its Student Loan Crisis - Ask Australia', July 10, p. BU 6). This is interesting because it turns out that Australia has nearly as much income inequality as the U.S.
What exactly enables the Aussie model to work? According to author Susan Dynarski:
"While students borrow as much as they do in the U.S. ($30,000 AU or $22,000 U.S.) the system works smoothly because borrowers pay nothing until their earnings reach about $40,000. Above that threshold, borrowers pay about 4 percent of their income until the debt is paid off. "
But there are two distinct features that stand out with the Aussie plan:
1) Unlike the U.S. standard plan where payments don't vary over time, "in Australia payments rise and fall with earnings just as our Social Security payments do."
2) Just like Social Security contributions, student loan payments in Australia are automatically withheld from pay. This means Aussie students don't have to fret about making payments on time, dodging phone calls from debt collectors, or defaulting on loans.
Some critics of the Aussie loan model have objected that (2) especially is unfair, asking 'Why should a student's loan get paid first when his food and rent still need to be paid?'
But that is precisely the reason for (1): loan payment variability. Thus, for the forlorn American college grad with debt the loan bills keep coming irrespective of the paycheck size. Plus, it's up to the borrower to work with a loan servicer to complete a 12-page application - often a gnarly process that can take months.
By contrast, in Australia when the new grad's earnings drop the loan payments drop with them. In effect, this amounts to exactly prioritizing need, given it allows the borrower to then devote a reduced budget to essential needs. And if they somehow lose their job? No problem! The loan payments stop, much as they did when many millions of students in the 1960s-70s took out National Defense Student Loans. The beauty of the Aussie model is that borrowers don't even have to make a phone call or complete an application to expedite payment stoppage.
I think it's time we give U.S. students a better deal by implementing the Australia student loan model here. This alternate program certainly needs serious consideration as the total student college loan debt surges past $1.1 trillion.