Lessons from Down Under: A Comparative Look at Income-Driven Repayment and Higher Education Tuition Policy in the United States and Australia.

• Date: 22 March 2023
• Author: Ciapciak, Kristen M.

"[T]he largest moral hazard [of income-driven repayment] is likely to be an excess of spending on education, either because students simply buy too much or schools accelerate their tuition increases. If the increased costs simply lead to more forgiveness, then students may become indifferent to costs, which could in turn erase any market check on prices. This is a real concern.... Left unchecked, such behavior would undermine the goals of the program and could ultimately bankrupt it." (1)

I. INTRODUCTION

On August 24, 2022, President Joe Biden announced a three-part plan for federal student loan forgiveness. (2) While the flashiest part of his announcement promised student debt cancellation of up to $20,000 for eligible borrowers, President Biden also proposed a significant alteration to the Department of Education's income-driven repayment program. (3) Income-driven repayment plans, which Congress first piloted in 1993, cap borrowers' monthly student loan payments at a percentage of their discretionary income. (4) Previously, eligible borrowers could enroll in any of four plans--Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), or Income-Contingent Repayment (ICR)--as an alternative to traditional loan repayment options, which can become extremely burdensome, particularly for lower earners. (5) Under the new Saving on a Valuable Education (SAVE) Plan, the Biden Administration attempts to make income-driven repayment more universal and advantageous to borrowers by: (1) cutting the amount that borrowers under these plans pay each month from 10% to 5% of discretionary income; (2) raising the amount of income not subject to income-driven repayment from 150% to 225% of the federal poverty level; (3) forgiving unpaid loan balances starting at ten years of payments instead of twenty years; and (4) eliminating the accrual of monthly interest. (6)

These proposals sound like a remarkable improvement to the United States' student loan system, and in many ways they are--the new SAVE Plan offers significant financial relief following the global pandemic and makes income- driven repayment a better financial option than conventional repayment for millions of borrowers. (7) Nevertheless, many economists argue these changes will cause colleges and universities to increase the cost of tuition. (8) These scholars reason that if borrowers are only responsible for ten to twenty years of payments equal to 5% of their discretionary income, after which the Department of Education will forgive all their unpaid debt, students will no longer have the motivation to take on smaller debts. (9) As a result, colleges lose a major incentive to keep tuition prices in check and have every reason to rapidly increase costs. (10) Economists have expressed concern about the possibility of unchecked tuition costs since the government first introduced income-driven repayment plans, and the Biden Administration's proposed changes to the program make such consequences less avoidable. (11)

Fortunately, the United States has a case study on income-driven repayment: Australia has used income-driven repayment as its predominant student loan model since 1989, when it introduced the Higher Education Contribution Scheme (HECS). (12) In 2003, the broader Higher Education Loan Program (HELP) absorbed HECS. (13) Together, the HECS-HELP system ensures the affordability of Australian undergraduate universities through an income-driven repayment model while directly legislating the maximum tuition cost for each course of study. (14) The Australian government is the primary funding source and regulator of Australia's higher education system. (15) If a university wants to receive government funding, it must comply with HELP provider requirements and cap its "student contribution" to the maximum legislated amount. (16)

This Note compares the United States' income-driven repayment model under President Biden's reforms to Australia's HECS-HELP system, analyzing how the United States can learn from Australia's successful income-driven repayment model and direct legislation of tuition costs. (17) Section II.A discusses the evolution of student loan law in the United States, detailing how income-driven repayment currently works. (18) Sections II.B and II.C analyze the relationship between student loan policy and rising tuition costs in the United States. (19) Section II.D details Australia's income-driven repayment system and how university funding requirements allow the Australian government to regulate tuition costs. (20) Having compared the two systems, Section III.A.1 explains why income-driven repayment is a student loan model worth the investment. (21) In contrast, Section III.A.2 evaluates the arguments against income-driven repayment, with a focus on the plausible consequence of rising tuition costs. (22) Section III.B proposes a solution to the tuition problem: adapting Australia's model of university funding requirements to the United States higher education system to incentivize regulated tuition costs. (23) Finally, this Note concludes that despite the difficulties in applying the Australian model in the United States, such a solution is both urgently needed and worth the costs. (24)

II. History

A. History of Student Loan Legislation in the United States

1. The Federalization of Student Loans

The United States federal government's involvement in the student loan industry traces back to 1958, when Congress passed the National Defense Education Act (NDEA). (25) The NDEA authorized colleges and universities to make loans to students with financial needs and guaranteed their repayment. (26) In the shadow of the Cold War and with national defense concerns, Congress aimed to ensure the education of the country's most talented students, regardless of their capacity to pay for that education upfront. (27) Since 1958, the United States government has borne the risk of student loans--to expand access to higher education and produce highly-trained, work-ready citizens--while each new policy aims to address and resolve the budgetary issues of that risk. (28)

2. Income-Driven Repayment Policy in the United States

The history of income-driven repayment in the United States has consisted of 0an incremental progression toward better terms for borrowers. (29) Congress piloted income-driven repayment in 1993 when it passed the Student Loan Reform Act (SLRA) through the Omnibus Budget Reconciliation Act of 1993. (30) The SLRA granted the Secretary of Education the authority to create an affordable option for student borrowers whose postgraduate earnings fell short of expected returns on higher education. (31) The Department of Education used this authority to create the ICR program, which remains in effect today. (32) The original ICR plan allowed borrowers to pay fixed monthly payments equal to 20% of their discretionary income exceeding 100% of the federal poverty level and have their debts forgiven after twenty-five years. (33) Notably, the ICR plan linked payments to the borrower's loan balance, discouraging excessive borrowing by allowing individuals with low balances to pay less than the 20% per month formula. (34)

The ICR plan was the only income-driven repayment program available to borrowers until 2009, when Congress enacted the IBR plan. (35) In response to concerns of increasing student debt burdens and the need for a more affordable option, the IBR plan raised the discretionary income exemption to 150% of the federal poverty level and lowered monthly payments to 15% of that income. (36) The IBR plan, however, failed to address the excessive borrowing issue, which was arguably a bigger issue under IBR than ICR due to its more generous terms and growing awareness of the benefits of income-driven repayment plans. (37)

The Obama Administration made several key reforms to the income-driven repayment system that expanded its reach and attractiveness. (38) First, the Health Care and Education Reconciliation Act of 2010 (HCERA) amended the IBR plan by reducing payments from 15% to 10% of discretionary income and decreasing forgiveness time from twenty-five to twenty years. (39) Due to congressional restrictions, this reform applied only to students who borrowed their loans after July 2014. (40) In 2011 and 2015, the Obama Administration took administrative action to create the PAYE and REPAYE plans, respectively. (41) These plans extended the terms of the amended IBR program to all past borrowers. (42) Additionally, REPAYE made income-driven repayment available to all borrowers by removing the requirement to show "partial financial hardship." (43) Each of these four income-driven repayment plans--ICR, IBR, PAYE, and REPAYE--aim to make student loan payments affordable regardless of a borrower's income. (44) Before SAVE, all four of these plans were available for borrowers to choose from. (45)

3. Biden's Reforms to Income-Driven Repayment

As part of his three-part plan for student debt relief, President Biden proposed creating a new income-driven repayment plan. (46) On August 22, 2023, President Biden named the plan SAVE and announced that borrowers could begin enrolling in the plan before student loan payments resumed in the fall of 2023. (47) SAVE will raise the discretionary income threshold to 225% of the federal poverty level. (48) Borrowers' monthly payments will be limited to 5% of that discretionary income, reduced from 10% under the current most affordable plan. (49) Additionally, for borrowers with loan balances under $12,000, the new plan promises to forgive remaining balances a substantial ten years earlier than previous plans. (50) Unlike any previous income-driven repayment option, the Biden Administration's plan will cover borrowers' unpaid monthly interest to ensure that loan balances never exceed their original amount, even for borrowers whose monthly payments are zero. (51)

Rather than adding an income-driven repayment...