President Obama has come out with his proposal to expand income-based repayment and permit consolidation of FFELP and Direct Loans. In recent weeks both Kevin Careyand Diane Auer-Jones (a former Department of Education official in the Bush administration) posted commentaries in the Chroniclesuggesting we take a look at the British and Australian models of student lending. Both make valid arguments, which are supported from this perspective from the trenches…
We face two major dilemmas with respect to paying for higher education: 1) high levels of student loan indebtedness are placing many college graduates (and non-completers) in very precarious financial circumstances, and 2) despite increasing levels of financial aid, including student loans, many students are still unable to afford the level of higher education to which they aspire.
Student Debt. President Obama’s plan is a legitimate step, but needs to go further. Under his plan, income-based repayment is not available to everybody, consolidation opportunities remain limited, private loan debt is not considered, interest rates are scheduled to increase dramatically, and students still have to resort to private loans because Direct Loans are not enough to cover costs.
Since 1989, college students in Australia have had the opportunity to borrow funds for higher education while paying off their debt over many years. Through the HECS/FEE-HELP programs run by the Australian government, students may borrow an amount up to the annual cost of tuition, and there are aggregate loan limits. Students pay a one-time fee of up to 25% of the loan value instead of interest, and the principal balance is indexed to inflation. Levels of repayment range from 4-8% of total income. To ensure collection, loan repayments are withheld from employee paychecks through an arrangement with the Australian Tax Office. This ensures payment from those earning above set income thresholds, allowing for lower fees/interest rates, and essentially eliminating defaults.
Student Access. We should understand that much of the underlying cause of student indebtedness is a lack of resources, either from the students and their families or from the financial aid system in the form of grant aid, to allow access to higher education for many students. The Australian program allows for higher borrowing limits. Should this also be considered?
Even public higher education is often not financially accessible to students from disadvantaged backgrounds, and frequently not to middle-income families, without students taking on substantial debt. With federal and state grants, students of most economic backgrounds can usually afford tuition at community colleges, though many still need student loans. At present, however, many disadvantaged and middle-income students are not able to afford the cost of an on-campus education at many of our nation’s public universities (Ohio is a good example), even after taking out maximum Federal Direct Loans.
Is this what we want?
The need for students to borrow to pay for higher education costs is not going away. It won’t disappear for those already holding debt, and there is nothing to take its place for future students looking for ways to help finance college expenses. We should not expect lower tuition rates at most institutions any time soon, as some are calling for. The higher education edifice is much too large and complex to restructure in the short term. Perhaps we should be asking if student loan debt is the problem, or if the real issue is being unable to repay that debt without completely devastating a reasonable standard of living?
Realistic? Among the legitimate questions about an American version of the Australian model are what levels of borrowing are reasonable and appropriate, what the fees or interest rates should be, and how much it might cost the government and taxpayers. The short-term investment would likely be significant. Whether longer term costs, considering increased collections and other cost-saving measures such as the elimination of both interest subsidies and education tax credits, would exceed what will occur under the status quo will require significant discussion and analysis.
Bottom-line. Students and parents would prefer solutions to higher education financing that they cannot have – lower prices, higher grants, or complete loan forgiveness. A restructuring of federal student loans may not be what everybody would like, but it could go a long way toward being what is needed. It’s about trade-offs. It’s about fairness. It’s about giving students and families the information they need to plan for college in a timely manner. The Australian program deals with both the debt and access issues, and lets students know up front what to expect.
And it works.
Now would be a good time to pull together a group of higher education economic leaders, including financial aid practitioners, to explore the practicality and feasibility of an American version of the Australian program. Certainly there are risks to taking a different path, just as there are to holding fast or completely blowing up the existing program and starting from scratch. If in the future, however, under whatever program is decided upon, a substantial number of borrowers are unable to repay their loan debt due to the lack of well-paying jobs, or there are not enough qualified people to fill those jobs, then having a higher-cost student loan program will be the least of our nation’s worries.
Jeff Zellers is the Vice President of Enrollment at Muskingum University