Could student debt reform give the US economy a boost in the long run?

Policymakers in the United States seeking to rebuild the world’s largest economy in the wake of the coronavirus pandemic can look east in Europe for inspiration to reform the vast system of financing education superior.

Student loans are a big business in the United States: the average American undergraduate takes nearly $ 30,000 in loans each year, according to the College Board.

The numbers are even higher in the UK. But a glance under the hood reveals stark differences that could prove useful in rethinking the American system, which many public policy experts say is broken.

In the United States, graduates who take out student loans are often required to begin repaying them soon after graduation. Monthly mortgage-type repayments total approximately between $ 200 and $ 300, Federal Reserve data shows.

In many parts of the UK, however, graduates are only required to start repaying government loans when their income exceeds around $ 34,000 per year. Even then, only 9% of winnings above this threshold are for refunds. And, if they are not repaid in full after 30 years, the unpaid debt is canceled.

The sliding scale system is designed to be fairer, as it places the heaviest repayment burden on those who earn the most.

“In other words, the rebate is like a tax,” said Gill Wyness, professor of economics at University College London. “There isn’t a situation where a student graduates, doesn’t have a job, and then has to start figuring out ways to start paying off their loans. It just doesn’t happen here. They are protected from risks and I think that is an extremely important safety net.

Abigail Butler, 23, a graduate of Bangor University in North Wales, agrees.

Abigail Butler poses on graduation day at Bangor University in North Wales. (Courtesy of Butler)

She graduated with a psychology degree in 2018 and got $ 54,000 in debt.

“I feel like it’s a lot of money. It’s pretty scary, ”Butler said. “Obviously, I’ll pay what I have to pay. But I could very well not, to be honest. I don’t mind too much because somehow they’ve raised the prices so much, and I can’t help but not be able to refund everything.

As Butler suggests, the UK has not always had a tuition-based higher education system.

In 1998, the government scrapped the kind of free education model that other European countries, including France and Germany, still adopt.

At the time, public universities in the UK operated with funding from the national government and local education agencies. But as the demand for colleges increased in the 1980s and 1990s, the system came under increased pressure.

But Nick Barr, a professor at the London School of Economics, argues that free education does not solve the problem. It just shifts the burden of paying from students to the state.

“The problem, especially in France, is that it’s free and everyone can go to university. So you have a lot of students, but not very good university funding, ”Barr said. “You have huge classes in the first year, little instruction, and a huge drop-out rate.”

The trade-off to make this system work, he said, is illustrated further north, in Scandinavia.

In Norway, for example, public spending on higher education represents about 1.7% of economic output. In the United States, it is 0.9%.

“Sweden, Norway, Finland – these are countries where people are willing to pay high taxes for high quality public services,” Barr said. “These countries have a very good kindergarten education, and therefore the class gradient in participation in higher education is much less pronounced than in most European countries or in the United States”

In many parts of the world, including the UK, the appetite is simply not there for higher taxes to fund programs like higher education. Thus, to offset the costs, the rates paid by students have increased over the past two decades. In 2010, the maximum tuition fees for many parts of the country were set at $ 11,500 per year.

Critics said the cost was simply too high and would deter students from applying to college. Wyness said that hadn’t happened, however.

“The reason we have big socio-economic gaps in the number of people going to college is because of things happening earlier,” she said. “Students from poorer backgrounds tend not to have enough entry requirements and grades to enter university. This is one of the many factors as to why they are not present rather than the actual cost. “

For those entering the higher education system, the current loan program could ease the immediate financial burden, but ultimately someone bears the cost if the loans are not repaid.

Institute for Fiscal Studies predicts that one in five current students will finish fully refund their loans. But Laura van der Erve, research economist at IFS, said all was not bad.

“Even if these graduates don’t pay off all of their student loans, they are likely to earn more and pay more in standard income taxes,” she said. “So overall, we think the government is not making a loss on all graduates, on average.”

A decade after changing tuition fees in parts of Britain, one question remains: does the more progressive system improve long-term financial flexibility for graduates? In the United States, concerns abound over whether high monthly repayments are forcing graduates to delay big life decisions.

It seems the jury is still out. Research by Claire Callender, deputy director of the Center for Global Higher Education, found that student loan debt is likely to delay homeownership, and possibly also marriage and the decision to have children, but only for women. Callender noted, however, “Some of these gaps in our knowledge are the result of the scope of the research… which limits the ability of studies to determine if a relationship exists and why it might exist.

This story is part of a “Marketplace Morning Report” special, “The Economy Reimagined,” devoted to how we might be able to make the system work for more people. You can find out more and listen here.

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