Legal Commentary

Reforming Higher Education: The Australian Model for Financing Education

By Kenneth Anderson

Instapundit points us to an article by Diane Auer Jones in the Chronicle of Higher Education, asking whether the US might do better in financing higher education to shift from the current student loan system to the Australian system:

[W]e might look to the Australian system of student aid for guidance on how to develop a better plan. In Australia, students each know in advance how much money is in their student-loan ?account? so to speak. They know that when the money runs out, government support is over (unless the student is moving on to professional school, for example, in which case supplemental funds are made available). This means that the student has the incentive to make good decisions, stick with the program, and complete their studies in a timely manner. In other words, there is no such thing as a stipend runner who simply stays in the system for as long as possible to keep collecting student-aid rebates and avoid entering the repayment period.

Australian student loans do not have interest associated with them in the traditional sense and unlike in the U.S. system, it is current economic conditions, as opposed to a person?s birth year, that determine the total cost he or she will bear in repaying student loans. For example, American students who enter college next year will pay over 6-percent interest on subsidized Stafford loans as opposed to students this year, who will pay only 3 percent. Meanwhile, the economic conditions next year are likely to be similar to current economic conditions.

In Australia, student loans are assessed an up-front fee that has remained relatively constant over the years (just now increasing from 20 to 25 percent). The fee does not increase beyond that, even if the borrower needs to interrupt repayment to pursue an advanced degree, to recover from an economic hardship, or to take time off of work for medical or family leave. There is no interest to accumulate, but instead the current value of the Australian student loan is determined based on the national Consumer Price Index. Loan costs rise and fall based on the annual economic performance of the country, as opposed to the individual student?s personal or professional circumstances.

In Australia, there is no such thing as a grace period, deferment, or forbearance. Instead, there is a minimum threshold income at which student-loan repayment is expected to commence. Currently, that threshold income is around $45,000 per year and as soon as the borrower meets that threshold, whether it is while the student is still in school or even years after graduation, repayments begin. The monthly payment amount is not based on the size or term of the loan, but instead on the borrower?s level of income, with students at the threshold level paying 4-percent of their earnings in loan payments and those earning higher wages paying no more than 8 percent of their earnings. Unlike in our Income Based Repayment program, interest does not capitalize and the total amount due does not increase just because a longer repayment term is in order (unless the economy is so strong that CPI increases dramatically over that period of time, in which case one would assume that wages would maintain a similar rate of growth).

Perhaps most importantly, there are no defaults in the Australian student-loan program. It is the Australian Tax Authority that collects student loan payments, not the Department of Education, and the borrower has the option of either making payments through routine payroll deductions (similar to the way in which Americans pay their FICA and other taxes) or through annual tax assessments.

Jones suggests that this system responds to three core needs of a reasonably efficient and fair financing system for higher education:  ?How do we design a financial aid program that better serves the needs of all students, that respects the ability of adults to make decisions for themselves and that provides adequate return to the taxpayer for his or her investment in others??  Jones? essay appears in a series of blog posts called ?brainstorming,? and I agree that it is a good moment to think about the foundations of higher education, from inputs to methods to outputs, including financing.

Comments are open, and I?d particularly appreciate reasoned views on whether this Australian system could work here, what its upsides are and its downsides.  Although there are obviously important questions about how a society could transition, at this point it?s a less important issue than what its tradeoffs are.  Please be civil and reasoned in any responses.  Thanks.

Full post as published by The Volokh Conspiracy on November 04, 2011 (boomark / email).