A Comparison of US and Australian Approaches
The burden of student debt has become a significant political issue in both the United States and Australia. In the US, President Joe Biden has taken steps to alleviate this burden by waiving interest or writing off debt for millions of borrowers. He has already forgiven or reduced 4.3 million debts and recently cancelled an additional 277,000. These actions are expected to boost consumer spending, improve mental health and credit scores for borrowers, and increase homeownership.
In Australia, Prime Minister Anthony Albanese is facing pressure to address the issue of student debt. While the Australian system is more favorable than the US system, with income-contingent loans and no interest charges, there is still room for improvement. A recent report by the Australian Universities Accord recommends indexing the amount owed each year to the lower of the rate of increase in prices or the rate of increase in wages. This would ensure that the value of the debt does not shrink rapidly as prices rise.
Another issue with the Australian system is the "repayment cliff," where borrowers suddenly have to start repaying their loans once their income reaches a certain threshold. This can lead to a significant financial burden and disincentivize people from earning more. Economist Bruce Chapman, who designed the Australian system, has acknowledged this as a mistake and suggests collecting repayments only on extra income rather than total income.
Furthermore, Australian banks currently treat student loans as debt when assessing eligibility for housing loans, making it difficult for some former students to obtain mortgages. Chapman proposes treating compulsory repayments as tax, which would more accurately reflect their impact on borrowers' financial situation.
With the May budget approaching, it is expected that the Australian government will announce some changes to the student loan system. While it is unlikely to be as comprehensive as the debt relief offered by Biden in the US, any improvements would be welcomed by borrowers struggling with the burden of student debt.