What Joe Biden Can Learn About Student Debt From the World
The new U.S. president is facing calls to ease the burden of educational loans. He can draw on lessons from the U.K. to Australia.
On his first day in office, President Joe Biden directed the Department of Education to extend the current freeze on student-loan payments until at least September.
But Democrats are pushing him to go further — and to take inspiration from abroad.
Dismayed that educational debt relief wasn’t mentioned in his $1.9 trillion stimulus proposal, members of Biden’s party have pushed him to use executive action to forgive $50,000 in student debt early in his presidency. Meanwhile the Democrats’ left flank loves to cite Nordic countries — with free college and generally lower student-debt levels — as policy models.
But some experts say the incoming president might have better luck looking elsewhere.
“The U.S. has a lot to learn from Australia and England,” said Lorraine Dearden, a professor of economics and social statistics at University College London who co-authored a recent study on the subject.
Like the U.S., both countries charge for higher education, and many of their students rely on student loans. But a few major differences make borrowing easier to manage.
One of the biggest: the way loans are structured. In the U.S., student loans function like mortgages. Borrowers have a fixed monthly payment over a set period of time.
But in England and Australia, loan repayments are dependent on a borrower’s income. Repayments only start once a borrower has reached a certain income threshold — and stop if a borrower loses a job.
The duration of the loan is variable, so loans can take longer to pay off than in the U.S. But because repayments are tied to employment, they tend not to dominate graduates’ job choices and financial lives as they can in the U.S. (Of course, the U.S. does have some income-contingent repayment plans. But these are complex and do not form the organizing principle of debt in the country.)
With that in mind, here is how Australia, the U.K. and several similar English-speaking countries handle educational loans, with insights from local advisers on how student debt fits into their clients’ financial lives:
Loans are interest free and repaid on a sliding scale dependent on income.
Cheap loans are available to almost all domestic students and are designed to cover the cost of both tuition and living expenses. No interest is charged on the loans, though the balance increases in line with inflation. The maximum that can be borrowed is A$155,448 ($121,435) for degrees like medicine and A$108,232 for most others. There is no means testing for eligibility.
Compulsory repayments begin at 1% when students earn above A$46,620, with the repayment rate climbing depending on earnings to 10% for those earning above A$136,740. There is no loan forgiveness. Graduates don’t pay if they don’t earn enough or die.
While tuition is subsidized for most degrees, the extent of assistance depends on the subject. The government is currently in the middle of a major shakeup that will make science and engineering degrees much cheaper, while increasing the cost of arts subjects.
Average cost of an undergraduate education: Under a new system being rolled out this year, costs will vary dramatically depending on subject. Tuition for a three-year arts degree will cost roughly A$44,000 compared with A$12,000 for a nursing student.
Compare this with the U.S., where prices vary widely between public and private colleges. A student attending a four-year public college in her home state faces a tuition sticker price of $10,560 per year, based on 2020-2021 average prices compiled by the College Board. For a private, non-profit college, that rises to $37,650.
Average student-loan debt load after graduation: In 2020, the average outstanding debt was A$23,280. About 255,000 people have debts above A$50,000.
In the U.S., the Federal Reserve estimates that nearly a third of American adults have incurred some form of education debt. In 2019, typical borrowers with any outstanding student debt held between $20,000 and $24,999.
A local financial adviser says: “The Australian education funding system is still very generous by international standards. For financial planning in Australia, this usually means that student loans are a fairly small component of plans, as it’s more beneficial to repay other loans and sometimes to build savings and investments rather than making payments above those that are compulsory.” — Michael Miller, certified financial planner at Wealth Market Northbourne in Canberra.
Interest levels on student loans are pegged to inflation, and students don’t pay anything back until they make over a certain threshold.
Applying for student loans is easy in the U.K. Although loans accrue interest, graduates only need to start repaying when they earn enough. In England, that threshold is currently £26,575 ($36,480) a year. This is then paid back at 9% of graduates’ salaries above that level. After 30 years, the debt is written off.
Average cost of a degree: College costs and student-debt policies vary across the U.K., but in England, tuition is capped at £9,250 a year. (In Scotland, local students actually pay nothing for college.)
Average student debt: The average loan balance on entry into repayment in 2020-21, according to the body that administers student loans in the U.K., was £40,280 for England, £24,960 for Wales, £23,520 for Northern Ireland and £13,890 for Scotland.
A local financial adviser says: “Repayment here is probably easier than in the U.S.,” said Charles Calkin, a partner and financial planner at the U.K. wealth manager James Hambro & Partners. “But it is still a big burden on young people. Taking 9% out of a salary, on top of national insurance and income tax, means we’re making it harder for a generation to get on the housing ladder and establish financial independence.”
The first year is fee free and loans are interest free while resident in New Zealand.
In New Zealand, it’s still possible to get at least some free college education. Since 2018, following Jacinda Ardern’s first election victory, New Zealanders are entitled to one year of tuition-free tertiary education.
After that, there is means-tested assistance for the poorest students. But most will need to take out loans. These loans, which can cover both tuition and living expenses, have zero interest as long as the graduate stays in New Zealand. (This helps the country keep skilled workers.) Repayments come out of wages at a rate of 12% of every dollar earned over a repayment threshold of NZ $20,020 ($14,400) a year.
Leave the country and you’ll start racking up interest and be required to make minimum payments to avoid late penalties. Borrowers who don’t get into trouble. Last year a woman was arrested at Auckland airport over non-payment of her student debt. Nearly three-quarters of borrowers with overdue payments in 2018-19 were based overseas.
Average cost of an undergraduate education: Costs vary by university and subject and range from NZ$6,000 annually for arts degrees to NS$16,000 for medicine.
Average student-loan debt load after graduation: As of June 2019, the average balance was NZ$22,630.
A local adviser says: “New Zealand has got the balance about right between the public good of education and the private gain. Student debt is no longer a major national talking point. While individuals can get shocked at the total dollar amount they owe, I encourage graduates to think of it as a tax. Yes, repayments lower your income but having a degree expands your opportunities. Where people with a very large debt can get a bit caught though is when buying their first home, as banks look at what the repayments do to your income.” — Martin Hawes, financial adviser in Christchurch.
Strikingly similar to the U.S., although tuition is generally cheaper up north.
Like the U.S., Canada’s federal government makes student loans. Unlike the U.S., the country’s provinces and territories play a much larger role in financial aid and run loan programs that supplement the federal government’s. Students are allocated an amount by the government based on tuition cost, savings and living situation.
As in the U.S., Canadian government loans accrue interest, which students don’t need to pay until six months after they leave school. The government’s repayment-assistance program can reduce payments to 20% of a borrower’s income — or even zero in some cases. With a few exceptions, students cannot receive more than 340 weeks of aid in their life.
One of the biggest differences between the U.S. and Canada: Canadian borrowers can discharge their debt obligations in bankruptcy, if they do so seven years after they stopped being full- or part-time students.
Average cost of an undergraduate education: In 2020-2021, $6,580 Canadian dollars ($5,214) per year. Costs vary, from degrees like dentistry costing more than C$20,000 per year to education degrees that run around C$5,000 a year.
Average student-loan debt load after graduation: In 2015, the latest available figure, the average outstanding debt was C$24,000. Some 45% of graduates who owed money held C$25,000 and over at the end of their degrees.
A local financial adviser says: “In Canada if you’re doing an undergrad degree and you’re living outside of your home city, where you’ve got to pay rent, you’re looking at probably C$20,000 a year, which over four years can add up to C$80,000-C$100,000 in costs. For an individual who is paying that themselves through loans and is not working to subsidize their studies, it can be significant. The government is very open to a long-pay cycle to get these things expired, but many clients want to get them done sooner. Today with interest rates being where they are and young professionals purchasing homes and considering other major purchases, it is quite normal to take that student loan and incorporate it into a single payment as part of an overall debt expiry plan.” — Tony Maiorino, vice president, RBC Wealth Management Services in Toronto
Undergraduate tuition is more or less free, which means that a large, government-backed student-debt system does not exist. However, students who need to borrow money can do so at a private bank.
Most Irish undergraduate degrees are free to local, EU and some other students through the Free Fees Initiative. Those who are eligible still need to pay a €3,000 ($3,650) “student contribution” each year, which goes towards student services and testing costs. Some students are eligible for a grant to cover it.
In effect, this means there is no centralized student-loan system. However, because students still need to pay the student contribution fee and for other expenses like rent and books, most major banks lend money to students, often at lower rates. The Bank of Ireland allows students to borrow up to €5,000, and AIB provides loans between €600 and €50,000.
Average cost of degree: Free, except for the student-contribution fee and living expenses.
Comment from financial Adviser: “Relative to what you have to pay in the U.S., it’s nothing,” said Eoin McGee, a certified financial planner and managing director of Prosperous Financial in Ireland. “Having said that, we would typically allow that it’s going to cost the parents about €12,500 every year the child is in college. That covers fees, rent, day-to-day living. And you could knock €5,000 off that if the child goes to college from home.”