Thus, education loans functioned as a system wherein shares of human capital were sold

Thus, education loans functioned as a system wherein shares of human capital were sold

As the United States grapples with the student loan crisis, pundits and politicians increasingly look abroad for some indication of how the problem might be alleviated.

Among the most lauded systems is Australia’s. Boasting no-interest government loans provided to all college students, price controls in place for universities, and an income-contingent repayment system in which monthly amounts are withdrawn as a payroll tax, Australia’s student loan system is widely considered to be among the most generous in the world.

While Australian students have fretted about recent reductions in the repayment cap, they have dodged most of the hardships facing American students when they graduate. Default and bankruptcy discharge simply aren’t an issue. Struggling graduates who fall beneath the repayment cap cease repayment until they are able to meet their obligations.

The system is not without its imperfections: a certain proportion of graduates will likely never repay the full amount of their debt or even reach the repayment threshold in the first place, creating a cost sink for the government. And there are concerns that even the relatively moderate cuts in the repayment cap ent of young people.

Still, Australia’s government has been more proactive than most in refining and updating its education finance system to meet competing and ever-shifting needs. And it seems that they’ve successfully zeroed in on and mitigated at least some of the problems that plague other countries, including the United States.

History up to 1989

20000 personal loans

The Labor Government of Prime Minister Gough Whitlam got rid of university fees in 1973. Prior to that point, fees were officially in place, though in practice many students avoided them through the receipt of scholarships.

Beginning in 1986, fees began creeping back with the institution of the relatively minor $250 Higher Education Administration Charge (HEAC). As the rates of secondary education completion rose, it became increasingly apparent that government subsidies would need to be augmented by personal contributions.

In May 1988, the Committee on Higher Education Funding, known as the Wran Committee after chairman Neville Wran, recommended that students be charged a flat fee and that repayment be contingent upon post-graduation income.

A version of an income-contingent system was first proposed by economist Milton Friedman in 1955, based partly on the notion that return on human capital was greater than return on physical capital.

This approach was almost entirely untested at the time. Income-contingent student loans had never been tried on a large scale, though Yale had tried income-share agreements for a brief period following their suggestion by another economist, James Tobin, in 1971.

Nonetheless, the committee’s recommendations were passed into law as the Higher Education Contribution Scheme (HECS) in 1989 and a grand experiment was embarked upon.

Developments Down Under

The HECS system initially required students to pay $1,800 a year, with a 15% discount if they were able to pay up front rather than later through payroll taxes. The repayment threshold was set at $22,000 a year, based on average earnings at the time. Once that threshold was reached, borrowers repaid anywhere from 1-3% percent according to a tiered scheme that topped out at $35,000.

Adjustments were made in the early 1990s to contribution, upfront discount and repayment rates, though the system remained essentially the same. In 1994, postgraduate tuition rates were deregulated.

Income thresholds for repayment continued to fluctuate throughout the decade and in 1996 additional income tiers were introduced. Differential contribution rates aligned to certain fields of study were introduced the next year.

The system continued to undergo refinement in the next century. In 2001, bankruptcy discharge was officially prevented. And in 2002, specific loans for postgraduate work were introduced in what was known as the Postgraduate Education Loans Scheme (PELS).

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