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Lessons from Australia’s Income Contingent Loan Policy

Alan Ruby, 

Senior Fellow,
Founding Director of the Global Engagement Office

In public policy debates about higher education, the key questions are usually “how many,” “who pays,” and “when do they pay”?  Of course the question are interconnected, the answer to quantity will shape and limit the financing options. And the context will matter: high tax environments, which have a wider array of public services, approach these questions differently than nations that have lower taxes and a user pays approach to services.

The “how many” question is becoming less relevant in the high- and middle-income nations as participation in higher education increases. Few, if any, of the G20 nations have “elite” higher education systems offering places to only 15% of the cohort of secondary school graduates. Most have “mass” systems that enroll up to 40% of the cohort and many are ”universal,” offering higher learning places to all who apply.

But as the proportion of the population accessing higher education increases, the willingness and capacity of the state to subsidize participation decreases. Direct funding of public institutions tends to be less generous and grants or scholarships to individuals are either more tightly rationed or reduced in value so they no longer cover the whole cost of participation. The result is an increase in the amount paid by the individual usually in the form of tuition fees or charges for materials and consumables. One justification offered for this shift in responsibility is that higher education is not solely a common good, it also has benefits to the individual, notably in higher earnings.

Most nations have pay-as-you-learn systems, where fees are levied when the student enrolls. Some nations seek to increase access to higher education by making higher education “free at the point of consumption” by delaying payments until the individual graduates and or even until graduates earn enough annually to make payments without significantly lowering living standards. This can be through loan policies, where the individual is contractually indebted and is expected to make monthly repayments regardless of income (much like a housing mortgage). Or they can be linked to the national income tax regime – like Australia’s income contingent loan policy, which has been operating for 30 years.

In its current form, the Australian policy has three different price points depending on the course of study. For example, medicine and law cost the student about $US 6,500 per year, while arts and the humanities cost $US 4,500. (This is not the full cost, as the government subsidizes higher education for the public good that is generated by highly educated citizens.) The fees can be paid in advance or they can be taken as accumulating debt. This loan starts being repaid when an individual’s income passes a fixed level per annum, currently set at about $US 42,000, and the most an individual will repay per year is 8% of annual income. Payments are collected in the same manner as the “pay-as-you-earn” income tax system. This has the advantage of smoothing out the repayment burden, which can be very demanding for US mortgage-style loan holders.

Like all good policy ideas, income-contingent student loans are shaped by context. There are characteristics about the Australian higher education system that are distinctive, notably most of the universities are public institutions, the federal government sets tuition rates for domestic students and contributes to the operating budgets of universities, as well as funding research on a competitive basis. In addition, there are large numbers of international students who pay on average $US 20,000 per year in tuition, a source of income which has reduced institutional reliance on government transfers. All these factors have shaped the Australian loan policy and lead some to argue that the United States context is too different to support such a policy at a large scale.  But a recent paper by Barr et. al. makes a case for an income contingent loan policy for US students that is different from the existing income-based repayment loan that very few people take up and which is hard to use in comparison to the Australian and UK policies.

Another distinctive element of the Australian landscape is the greater transparency about the costs of a university place to the individual and the rate at which interest is charged and the income point at which repayments start. The contrast with the opaque and variable arrangements in the United States is stark and underscores the value of a net price calculator.