The Australian Approach to Paying for College

By now you probably have some idea about how students pay for college.  You also have probably heard about this scary four letter word:  debt.  Yes, almost every student in the United States will graduate with some form of debt.  In fact, according to the Wall Street Journal the average student debt for an American student graduating from college in 2015 is about $35,000.  That is a heck of a lot of money and leaves many students worried about just how they are going to be able to pay it back.  I know I don’t have that kind of money laying around, and I’m old!  But what if there was an easy way to deal with all that debt?

This article from The Atlantic discusses the approach that Australia takes to deal with paying for college and student loans.  Australia utilizes something called income-based repayment.  Income-based repayment is exactly what it sounds like.  You pay back your student loans based on how much you earn.  Many countries, including the United States, have income based repayment for their government-backed student loans, but Australia takes it a step further.  While in the United States income-based repayments are required to start when you reach an annual income of $17,820, the Australian system  doesn’t start until you reach an annual income of $39,152 in USD.  But that’s not all.  The US system’s payments start at 10% of your total income (but could be up to 20%), while the Australian system’s payments start at 4% of your total income and come straight out of your paycheck just like your taxes.  That percentage gradually increases to 8% of your total income when you hit $79,945 in USD.  Furthermore, federal loans paid with income-based repayment in the US accrue compounding interest, Australian loans do not accrue any interest, only increasing with inflation (2% last year) which means less money spent on the loans on the whole.

There are other benefits of the Australian system, too.  This system makes it almost impossible to default on student loan debt.  And since there is only one repayment plan, signing up is a lot easier, too.  No deciding which plan is right for you.  Just fill out the form, check the box, and you’re finished.

There are a few drawbacks to the Australian system compared to the American system:  1) If you haven’t paid back all of your loans in the US after 20 to 25 years through income-based repayment then your leftover balance is forgiven and taxed as income.  In Australia, you’ll keep paying until you’ve paid it off completely.  Ideally, you won’t stay on income based repayment forever in the US and will eventually land a job that pays you enough that you won’t even qualify for it.  And likewise in the Australian system, ideally your income will continue to increase and you will be able to pay off more and more of your debt as you progress professionally.  2) The Australian system loses money.  “About 17 percent [of loan debt] will ultimately go uncollected.”  Some people will simply never be able pay off their entire debt and will continue to have that additional “tax” taken out of their paycheck.  3) There is concern with the Australian system that some students will be too comfortable with the safety net provided them and will be a little frivolous with what they pursue and won’t be concerned with how much their degree is going to cost.

For me, I think these drawbacks are minor compared to the potential benefits to students, especially lower-income students who are the most likely to be worried about debt.  Paying for college shouldn’t be scary.  It should be easy, and I think the Australian system is a whole lot easier than the American one.

What do you think?  Are you ready to move to Australia?

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