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Reflections on the US College Loans System: Lessons from Australia and EnglandAbstract: There is wide agreement the US student loan system faces significant problems. Seven million borrowers are in default and many more experience non-repayment. The stress of repayments faced by many students results at least in part from the design of US student loans. Specifically, loans are organised like a mortgage, with fixed monthly repayments over a fixed period of time, creating a high repayment burden on borrowers with low income. This paper draws on the experience of the income-contingent loan (ICL) systems operating in England and Australia, in which monthly repayments are related to the borrower's monthly income. By design, those systems explicitly include insurance against problems of repayment during periods of low income. We discuss the design of this type of loan in detail since such an exercise seems to be largely absent in the US literature. Drawing on data from the US Current Population Survey (CPS) we provide two main empirical contributions. - A stylised illustration of the revenue and distributional implications of different hypothetical ICL arrangements for the USA; and - An illustration of repayment problems faced by low-earning borrowers in the US loan system, including a plausible example of adverse outcomes in the Stafford loan. Importantly, we compare repayment burdens under the existing and alternative systems. Our illustrations show how US mortgage-style loans can create financial difficulties for a significant minority of US borrowers, difficulties which a well-designed ICL has significant potential to address

Author

Listed:
  • Nicholas Barr

    (London School of Economics and Political Science)

  • Bruce Chapman

    (Australian National University)

  • Lorraine Dearden

    (University College London, Institute for Fiscal Studies and IZA)

  • Susan Dynarski

    (University of Michigan and NBER)

Abstract

No abstract is available for this item.

Suggested Citation

  • Nicholas Barr & Bruce Chapman & Lorraine Dearden & Susan Dynarski, 2018. "Reflections on the US College Loans System: Lessons from Australia and EnglandAbstract: There is wide agreement the US student loan system faces significant problems. Seven million borrowers are in de," DoQSS Working Papers 18-02, Quantitative Social Science - UCL Social Research Institute, University College London.
    • Handle: RePEc:qss:dqsswp:1802
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    References listed on IDEAS

    as
    1. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
    2. Bruce Chapman & Andrew Leigh, 2009. "Do Very High Tax Rates Induce Bunching? Implications for the Design of Income Contingent Loan Schemes," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 276-289, September.
    3. Bruce Chapman & Timothy Higgins & Joseph E. Stiglitz (ed.), 2014. "Income Contingent Loans," International Economic Association Series, Palgrave Macmillan, number 978-1-137-41320-8.
    4. Haroon Chowdry & Lorraine Dearden & Alissa Goodman & Wenchao Jin, 2012. "The Distributional Impact of the 2012–13 Higher Education Funding Reforms in England," Fiscal Studies, Institute for Fiscal Studies, vol. 33(2), pages 211-235, June.
    5. Adam Looney & Constantine Yannelis, 2015. "A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 1-89.
    6. Lleras,Miguel Palacios, 2004. "Investing in Human Capital," Cambridge Books, Cambridge University Press, number 9780521828406, October.
    7. Nerlove, Marc L, 1975. "Some Problems in the Use of Income-contingent Loans for the Finance of Higher Education," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 157-183, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    School performance; Income contingent loans; mortgage-type loans; student loan design; loan defaults; repayment burdens;
    All these keywords.

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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