Australian College Loan Model Could Be A Boon For U.S. Students

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."

and:

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.

Will Congress Double the Debt of College Students on July 1st? Probably!

When I paid off all $4k of my college loan debt, one year after leaving Peace Corps in August, 1975, it was a day to truly celebrate. More to the point, I'd done it by rigorously saving while in Peace Corps (even on a $125/month stipend) and also after landing my first job after the Corps - working as Head of the Science Dept. at a Barbadian Secondary School.

But make no mistake, that feeling of debt liberation never would have been remotely feasible had I not had the benefit of National Defense student loans at 1 percent interest! This was made possible under the National Defense Education Act (NDEA) of 1958, and the fact my first degree was in a hard science subject qualifying under the Act. The release of loan debt at such at early phase, then made it possible for me to marry in 1975 (the month I left Peace Corps) and also launch out on an independent life with my new wife.

Pity the poor college grads today, however, who are saddled with atrocious aggregate loan debt that now exceeds $1 trillion, and is set to get much worse. The Huffington Post in March, referencing a  New York Federal Reserve report, pointed out that the proliferation of indebted students and their families had knock -on effects on multiple other areas of the economy, including:

- Fewer people with student loans are buying homes

- Fewer people with student loans are able to secure and maintain decent credit ratings

- Delay in buying a car, hence having lower access to job availability

- Postponement of marriage

- Inability to rent because of high debt to income ratio, so having to live with parents

- Too many graduates (and even non-grads) encumbered by student loans can't pay them off efficiently because they can't access the quality jobs to do so (half of all the grads are found in jobs that don't require a college degree). They may then be prey to loan sharks or having liens placed on accounts, property.


As Malcolm Harris has long pointed out, since most student loan debt is government- backed  and can never be discharged, the type of meltdown the student loan explosion could precipitate is taking a different shape than the mortgage crisis, with the victims (student borrowers) already in place and struggling.


And the tragedy is that it's set to get worse, much worse.  On July 1, 2013 interest rates on many new federal student loans are set to DOUBLE (from 3.4% to 6.8%)  – meaning any college  education gets more expensive and more out of reach for millions of students and middle class families. All the problems highlighted above will therefore become much more intractable.

Readers should see some notes of resonance from what transpired last summer, when rates as on the Stafford loans, were also due to jump. But students took to Facebook and Twitter to barrage their reps and the higher debt noose was postponed. A patchwork law was implemented to keep loan rates the same, but that expires on Monday.

Basically, absent further congressional action, students are screwed as the interest rate on new subsidized student loans is scheduled to go up again. To stop this from happening, President Obama put forward a long-term solution that cuts rates this year on nearly all new loans, ensures that all students have access to affordable repayment options, and does not charge students higher interest rate to pay for deficit reduction. Sadly, the Repuke congress doesn't appear to be taking him on, and indeed, given their austerity mindset, is fully prepared to let students suck salt .....no matter how many FB messages and Tweets they dispatch.

On the (slightly) positive side, the impending July 1st  rate hike will affect only undergraduates with subsidized loans, where the federal government absorbs some of the interest rate. This makes up about a third of government student loans, and they are awarded based on economic need.  Other undergraduate and graduate students who take out unsubsidized loans, have already been paying interest rates set at 6.8% since 2007.   But the point is that many more will now be put at the higher interest-debt level and that's not news students of modest means and their families want to hear.

As the Whitehouse.gov website put it:

"Now is not the time to make school more expensive for our young people. As our economy continues to recover – at a time when interest rates are at historic lows -- the 7 million students who rely on these loans to finance their education shouldn’t face higher debt as they work to graduate, start a career or buy a house."

I could not agree more!

How Did College Grads Acquire the Debt "Millstone" Round Their Necks?

We read in numerous media (e.g. WSJ, The Economist, NY Times etc.) that there is now nearly $1 trillion in outstanding college debt. Many recent grads are so buried in debt (especially from the the usurious interest rates of private loans) that it will be decades before they get out from beneath it, if at all.

And the mountain of student debt threatens to become much more horrific a problem if the interest on gov't-linked Stafford student loans are increased from 3.4% to 6.8% this June, as the House GOP wants to do (in conformance with terrific Wall Street pressure to maximize profits for private lenders).

In fact, the worst error a student can make is taking on any private loan from a private lender. My advice on this score would be if you can't obtain a federal loan of some type (or combination), don't even think of going to college. Perhaps attend a community college, get an associate degree and done.

The reasons are obvious to any one who knows anything about these loans starting with the fact they usually carry uncapped variable interest rates, and they aren't required to have flexible payment options. As if these aren't bad enough there is no statute of limitations on collections, no chance to file for bankruptcy protection and the collection agencies can dog you into old age, even collecting your social security monies! Most current students are finding that though on paper they may owe $70,000, the actual total is more like $210,000! No wonder many are in despair!

Other downsides of these private loans are also clear:

- Delay in buying a car - purchasing a home

- Postponement of marriage

- Inability to rent because of high debt to income ratio

- Being forced to deal with sharks from private collection agencies

- Having liens placed on bank accounts and property

- Wages garnished, tax refunds seized

As one can see the misery index is incalculable, and the cost to benefit ratio in the end may not be worth it. Indeed, the only jobs noted in one WSJ piece three days ago that a grad can be certain of getting, are:  home health aid, Starbucks barista, or waste service ("sanitary") engineer.. The highly paid technical and skill jobs are almost all gone and unlikely to re-appear given a starved demand economy. That's the bottom line. So, what's the point of taking out $150-200 k in debt when one's life time earnings may not reach even twice that? (Debt to income ratio of 50%)

When I graduated from the University of South Florida in 1971, I had roughly $1, 500 in National Defense Student Loans outstanding. These were easily paid off after I left Peace Corps, at the federal 1% interest rate. By 1972, the government - enabled loans had essentially dried up after Nixon launched the Student Loan Marketing association or "Sallie Mae" which grew into a private-gov't hybrid with the main aim to shift the burden of paying for college loans from government to students.

So long as loan amounts remained in line with inflation there was no problem. Once inflation began galloping away in the late 70s, much of it owing to the higher price of oil, all bets were off. Loan interest now began to ratchet up and more private burdens were imposed as government assistance was pulled back. By the end of Reagan's adminstration, the balance between need-based grants and interest-bearing loans had shifted dramatically, to the extent Pell Grants covered barely one half what they did in 1981. And the student loan industry began to see its profits soar.

The catalyst was an ambitious Sallie Mae executive named Albert Lord. Within a decade of joining the company as comptroller in 1981, Lord rose to CEO with a plan to take Sallie Mae private and shift the company’s center of gravity from Washington to Wall Street. The desire was mutual and Sallie Mae’s assets multiplied eightfold during the Reagan years. Investors were salivating over the chance to get a piece of Sallie Mae’s expanding $15 billion portfolio of government-backed loans.It's been downhill for students ever since.
In 1996, Sallie Mae went private and began trading as the SLM Corp. All of the trends of the 1980s accelerated, and by the early aughts Lord sat on a personal fortune of $230 million. Sallie Mae’s 2003 annual investors report boasted of “strong fee income growth, largely from debt management operations.” With his profits Lord began building a private 18-hole golf course on his Maryland estate. Shortly after breaking ground, he bitched to The Baltimore Sun about having to deal with zoning officials. “I hate rules,” said Lord.
Not all rules. When he uttered these words, Sallie Mae had just spearhead the lending industry’s lobby effort behind the 2005 Bankruptcy Act, which stripped private student loans of bankruptcy protection. (Such protections around federal loans had long been chipped away.) Leading the effort in Congress was Lord’s golfing buddy and current majority leader, John Boehner. It was around this time that Sallie Mae hired Boehner’s daughter as an executive at one of its largest collection companies. Sallie Mae remains the largest donor in the history of Boehner’s PAC, followed by the unctuous for-profit education industry, where private student loans are most common, most toxic and least likely to result in a college degree.

Students, especially in massive loan debt, need to remember who their friends, and who their enemies are, as this November approaches. One big objective for them, and Occupy: Get out the vote and take back Boehner's House from underneath him! Show him that payback can be a bitch! This ought to be doubly motivating if the Goopers allow an increase in the interest rates of the Stafford loans to 6.8%..