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January 31, 2022

Is there a better way to handle student loans?

Students and workers seeking retraining are borrowing extraordinary amounts of money through federal loan programs, potentially putting a huge burden on the backs of young people trying to kick start careers.

The government-issued loan program's costs to taxpayers, including provisions for interest relief for unemployed graduates and a default rate of more than one dollar in eight, is somewhere near the $20 billion mark, according to various estimates. 

Clearly, graduating in the weak job markets of 2012 is going to be challenging for a student carrying, say, $40,000 in debt.

Is there a better way? Well, things are certainly different in Australia, for instance.

Down under, through the HECS/HELP programs run by the Australian government, students may borrow an amount up to the annual cost of tuition, which is heavily subsidized.

They pay a one-time fee of up to 25% of the loan value instead of interest, and the principal balance is indexed to inflation.

Student loan repayments kick in when the borrower’s income hits around $47,000 per year. As soon as you meet that threshold, even if turns out to be years after graduation, you have to pay up.  

The monthly payment amount is not based on the size or term of the loan, but instead on your level of income, with students at the threshold level paying 4% of their earnings in loan payments and those earning a higher salary paying up to 8%.   

On top of that, the default rate is close to zero, largely because collections are handled by the Australian Tax Authority.

Like anything, it's not quite as simple as outlined -- but it is an interesting alternative to Canada's current system.

Should student loans be tied to future income in this fashion. Would things be different for you if they were?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...