Australia’s student loan system is a good model for the U.S., writes Diane Auer Jones on Brainstorm. In the U.S., students making minimal progress can keep collecting Pell Grants (for nine semesters) and postpone repaying loans.
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.
Australians don’t pay interest on student loans. Instead, they pay an up-front fee and a payment based on the national Consumer Price Index and the borrower’s income. Loan repayment starts when the borrower reaches a minimum income, now set at around $45,000 per year. Those making the minimum pay 4 percent of their earnings; higher earners pay no more than 8 percent.
Nobody defaults, because student loan payments are collected by the Australian Tax Authority, not the Department of Education.
University of Tennessee Law Professor Glenn Reynolds (aka Instapundit) has another idea: Let borrowers discharge student loan debt in bankruptcy and charge universities if their graduates default.
I think we should return to the days when student loans were dischargeable in bankruptcy, starting five years after graduation. This will allow graduates who are unable to pay to get out from under what is otherwise a potential lifetime of debt-slavery. . . .
But the real incentive-alignment part is this: Put the institutions who issued the degrees on the hook for the money they received. Making them eat the entire loan balance would probably bankrupt a lot of colleges (though that should tell us something about the problem right there), but sticking them with even a small fraction — say, 10% or 15% — would be enough to inspire a much greater degree of concern for how much debt students take on while in school, and for how likely they are to find gainful employment after graduation.