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Reflections on the US college loans system: Lessons from Australia and England


  • Nicholas Barr
  • Bruce Chapman
  • Lorraine Dearden
  • Susan Dynarski


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. • A stylised illustration of the revenue and distributional implications of different hypothetical ICL arrangements for the USA; and • 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.

Suggested Citation

  • Nicholas Barr & Bruce Chapman & Lorraine Dearden & Susan Dynarski, 2018. "Reflections on the US college loans system: Lessons from Australia and England," CAMA Working Papers 2018-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2018-29

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    References listed on IDEAS

    1. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
    2. Bruce Chapman & Andrew Leigh, 2009. "Do Very High Tax Rates Induce Bunching? Implications for the Design of Income Contingent Loan Schemes," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 276-289, September.
    3. Nerlove, Marc L, 1975. "Some Problems in the Use of Income-contingent Loans for the Finance of Higher Education," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 157-183, February.
    4. Haroon Chowdry & Lorraine Dearden & Alissa Goodman & Wenchao Jin, 2012. "The Distributional Impact of the 2012–13 Higher Education Funding Reforms in England," Fiscal Studies, Institute for Fiscal Studies, vol. 33(2), pages 211-235, June.
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    Cited by:

    1. Britton, Jack & van der Erve, Laura & Higgins, Tim, 2019. "Income contingent student loan design: Lessons from around the world," Economics of Education Review, Elsevier, vol. 71(C), pages 65-82.
    2. Cai, Yu & Chapman, Bruce & Wang, Qing, 2019. "Repayment burdens of mortgage-style student loans in China and steps toward income-contingent loans," Economics of Education Review, Elsevier, vol. 71(C), pages 95-108.

    More about this item


    Income contingent loans; mortgage-type loans; student loan design; loan defaults; repayment burdens.;

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity


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