The United States of Student Debt - 2023 Report
How Student Loans Work in the U.S. and Other Countries
This is the first part of our four-part series that looks at the debt burden facing U.S. student borrowers today – and the post-pandemic policy changes that will shake it up – created with career data journalist Emily Barone.
Have you ever wondered how student loans work, not just in the U.S., but across the globe? What ingredients mix together to cook up that simmering pot of student debt? And how do tuition costs and repayments compare around the world? Part 1 uncovers all that and more.
Grab your thinking cap; it’s time to get schooled!
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What is student debt made of?
Student loans are one of the largest types of debt in the U.S., the second largest consumer debt category after home mortgages. This debt stood at nearly $1.8 trillion in the first quarter of 2023, according to the Federal Reserve. Here’s a quick primer on how these loans work.
Most student debt is from federal financial aid, also known as Title IV loans. These loans cover tuition, fees, room and board, books, and other expenses. Unlike private loans, the interest rate is fixed (see current fixed rates here). Federal loans today generally fall into three categories:
Today’s direct loans account for the bulk of outstanding federal student debt on the books today. But this wasn’t always the case. Loan programs have come and gone over time, including most recently the Federal Family Education Loan (FFEL) program and the Perkins Loan program. These indirect programs supported loans issued by private lenders and schools. They were discontinued in 2010 and 2017, respectively. While these loans are still being paid off, their outstanding balances have been eclipsed by direct loans.
Federal loan borrowers have different repayment plans to choose from. Those who enter the Standard Repayment Plan pay fixed installments of at least $50 each month for up to 10 years (unless the loan is a consolidation loan, which can stretch for 30 years, depending on the amount).
But many borrowers are unable to pay the fixed installments, and opt for one of the government’s income-driven repayment (IDR) plans. With these plans, the repayment is based on income and family size—and some borrowers have no monthly payment at all. The terms of these loans are 20 to 25 years. The remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period.
The catch, however, is that even under IDR plans, interest on student loans can add up. Prior to the pandemic pause, many borrowers found that, even when their payments were current, their balances went up due to interest accrual. More on this in the forthcoming chapters.
Loan costs & payments:
A global comparison
Around the world, the amount individuals pay for tertiary education—including bachelor’s and other advanced degrees—varies greatly by the cost structures of each country. Private expenditures on higher education are under 20% in countries like Germany, Austria, Denmark, and Sweden but are over 60% in Australia, Japan, the U.K., and the U.S., according OECD data.
As a result, students in the U.S. have loan burdens that can stifle their financial well-being significantly more than students in other countries. And yet, the country has very high rates of college attainment—higher, even, than other countries that offer subsidized education or more lenient loan-repayment systems.
Here’s a quick glimpse at how other countries differ from the U.S. in their affordability, their payment mechanisms and their academic achievements:
In Australia and the United Kingdom, education is expensive and students foot the bill. This is similar to the U.S., but their repayments are automatically withheld, like taxes, and are based on income.
The vast majority of students in these countries opt for income-based repayment rather than paying in full for their tuition. The system is convenient: Loan repayment kicks in automatically and adjusts with income, but only if the borrower earns a certain amount. (In this sense, the new SAVE plan in the U.S. will operate in a similar fashion—effectively, any borrower who is earning minimum wage will not have to make payments.) Australian student debt doesn’t clear after a set period of time but it does in the U.K. after 30 years.
Countries including Germany and France provide subsidized education and tuition is capped.
One of the big reasons why student loan debt in the U.S. has ballooned is because the government has no authority to cap the amount that colleges charge. In some countries, free or low-cost tuition is possible in part because robust social systems (in the form of taxes) cover the costs. In Germany, for instance, public universities waive tuition fees entirely; students are responsible for administrative fees and student costs of living. The schools’ tuition rates must adhere to the budgets set by the government.
In South Korea, where higher education attainment rates are among the highest in the world, students rely on debt, family funds, and scholarships.
Most South Korean students enroll in independent private universities. While colleges in Korea receive government funding, they also rely on tuition from its students and there is no cap to what they can charge. According to a 2020 study in the Journal of Asian Sociology, nearly 60% of students received help from their parents in 2018, down from 70% in 2010. Part of this is due to the creation of the Korea Student Aid Foundation (KOSAF) in May 2009, which expanded the government’s budget for national scholarships and student loans. After the introduction of an income-based national scholarship program in 2012, the number of recipients soared and, as of 2016, more than 80% of enrolled students receive a scholarship. That same year, about 20% had loans.
The United States is now rolling out repayment plans that offer borrowers more debt relief. In some ways, these reforms mimic other countries.
The U.S. currently has four income-driven repayment (IDR) plans that have the advantage of tying repayment to income levels, allowing for longer payback periods than the standard repayment plan. Borrowers in these plans are less likely than those in fixed-payment plans to default on their loans, noted a 2020 Congressional Budget Office report. Yet that report also found that less than a third (27%) of borrowers were enrolled in these plans in 2017. While that’s up from 10% in 2010, it’s small compared with some countries that take this approach.
The Biden administration is in the process of modifying the government’s IDR options, (including rolling out the new SAVE plan) to help to provide lower monthly payment requirements than previous plans. In some ways, these new systems will bring the U.S. more in line with some other countries.
What system is best?
With so many cost structures around the world, which is best? It’s impossible to say. One study from the American Enterprise Institute, a U.S. policy think tank, found that government support doesn’t always result in better-resourced schools—nor higher rates of educational attainment. Using data from the OECD, the study compared schools’ subsidies (the percent of funding from public sources) with student resources (spending per student) and found tradeoffs with every system. For example, universities in Greece are almost fully funded from the government, but resources are spread thin. On the other hand, universities in the U.K. don’t receive a lot of government funding, but there are greater resources available to students.
What's next?
PART 2: The impact of the pandemic on U.S. student debt.
We take a look at the rapid rise of student debt, followed by the dramatic impact that the pandemic had on repayments. Stick with us as we unravel the complicated world of student loans, one blog post at a time.
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Want to see the full report with the detailed analysis? Download it here