Reflections on the US College Loans System: Lessons from Australia and England

38 Pages Posted: 2 Apr 2018

See all articles by Nicholas Barr

Nicholas Barr

London School of Economics

Bruce Chapman

Australian National University, Research School of Social Sciences (RSSS) - Economics Program; Australian National University (ANU) - Crawford School of Public Policy

Lorraine Dearden

Institute for Fiscal Studies (IFS)

Susan M. Dynarski

National Bureau of Economic Research (NBER); University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan at Ann Arbor - School of Education

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Abstract

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. First a stylised illustration of the revenue and distributional implications of different hypothetical ICL arrangements for the USA; and second 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.

Keywords: income contingent loans, mortgage-type loans, student loan design, loan defaults, repayment burdens

JEL Classification: H28, I22, I28, J24

Suggested Citation

Barr, Nicholas and Chapman, Bruce James and Dearden, Lorraine and Dynarski, Susan M., Reflections on the US College Loans System: Lessons from Australia and England. IZA Discussion Paper No. 11422. Available at SSRN: https://ssrn.com/abstract=3153386

Nicholas Barr (Contact Author)

London School of Economics ( email )

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Bruce James Chapman

Australian National University, Research School of Social Sciences (RSSS) - Economics Program ( email )

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Australian National University
Canberra, Australian Capital Territory 0200
Australia

Australian National University (ANU) - Crawford School of Public Policy

ANU College of Asia and the Pacific
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Canberra, Australian Capital Territory 0200
Australia

Lorraine Dearden

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Susan M. Dynarski

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

735 South State Street, Weill Hall
Ann Arbor, MI 48109
United States

University of Michigan at Ann Arbor - School of Education ( email )

610 East University Avenue
Ann Arbor, MI 48109-1259
United States

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