Could reforming student loan debt provide a long-term U.S. economic boost?

Policymakers in the United States seeking to rebuild the world’s biggest economy in the wake of the coronavirus pandemic may look east to Europe for inspiration on reforming the vast higher education finance system.

Student loans are a big business in the U.S.: The average American undergraduate takes on almost $30,000 in loans each year, according to the College Board.

The figures are even higher in the United Kingdom. But a look under the hood reveals stark differences that could prove helpful in reimagining the U.S. system, which many public-policy experts say is broken.

In the U.S., graduates who take on student loans are often required to begin paying them back shortly after graduation. The mortgage-like monthly repayments total roughly between $200 and $300, data from the Federal Reserve shows.

In many parts of the UK, though, graduates are only required to begin paying back government loans when their income exceeds around $34,000 a year. Even then, only 9% of earnings above that threshold go toward repayments. And, if they’re not paid back in full after 30 years, the outstanding debt is forgiven.

The sliding-scale system is designed to be fairer because it places the highest burden for repayments on those who earn the most.

“In other words, repayment is like a tax,” said Gill Wyness, professor of economics at University College London. “You don’t have a situation where a student graduates, doesn’t have a job and then has to start finding ways to start repaying loans. That just doesn’t happen here. They’re protected from risk, and I think that’s an extremely important safety net.”

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

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

“I feel like it’s quite a lot of money. It’s quite scary,” Butler said. “Obviously I’ll pay what I have to pay. But I very well might not, to be honest. That doesn’t bother me too much because in a way, they’ve put the prices up that much, and I can’t help if I can’t pay it all back.”

As Butler suggests, the UK didn’t always have a tuition-based higher education system.

In 1998, the government did away with the kind of free education model other European countries, including France and Germany, still embrace.

Back then, public universities in the UK operated with funding from the national government and local education agencies. But as demand for college rose in the 1980s and 1990s, the system came under increased strain.

But Nick Barr, a professor at the London School of Economics, contends free education doesn’t solve the problem. It just shifts the payment burden off students and onto the state.

“The problem, particularly in France, is it’s free and anyone can go to university. So, you’ve got lots of students, but not very good university finance,” Barr said. “You have huge classes in the first year, not much teaching and a huge dropout rate.”

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

In Norway, for example, public spending on higher education totals around 1.7% of economic output. In the U.S., it’s 0.9%.

“Sweden, Norway, Finland — those are countries where people are prepared to pay high taxes for high-quality public services,” Barr said. “Those countries have very good nursery education, and therefore the class gradient in participation in higher education is much less pronounced than in most European countries or the U.S.”

In many parts of the world, including the UK, the appetite just isn’t there for higher taxes to fund programs like higher education. So, to offset the costs, the rates students pay have risen over the last two decades. In 2010, the maximum tuition fee for many parts of the country was 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 hasn’t happened, though.

“The reason we have large socioeconomic gaps in who goes to university is down to things that happen earlier on,” she said. “Students from poorer backgrounds tend not to have enough entry requirements and grades to get into university. That’s one of the many factors as to why they don’t attend rather than the actual cost.”

For those who do enter into the higher education system, the current loan program might alleviate the immediate financial burden, but ultimately someone shoulders the cost if the loans go unrepaid.

The Institute for Fiscal Studies predicts 1 in 5 current students will end up fully paying off their loans. But IFS research economist Laura van der Erve said that isn’t all bad.

“Even if those graduates aren’t paying back all 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 the tuition-fee change in parts of Britain, one question remains: Does the more progressive system improve longer-term financial flexibility for graduates? In the U.S., worries abound about whether high monthly repayments force graduates to delay big life decisions.

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