You may have seen a recent announcement from President Biden on plans to directly address graduate and student hardship with loan forgiveness.
The US higher education system (if it even makes sense to talk about a single system) is a complex and bewildering mess, with student finance no less complex than any other aspect.
In the US student loans have been “paused” since 2020 as a way of addressing hardship relating to Covid-19 – graduates with Pell Grants (we’ll get to that, don’t worry) have not made repayments, and no interest has accrued. This pause has been extended several times, and is currently slated to end on 31 December 2022.
When payments do restart the plan is to lower the standard repayment from 10 per cent of discretionary income (that too) to 5 per cent. There’s also plans to offer up to $20,000 of cancellation for Pell Grant recipients ($10,000 for other federal grants) – this is means-tested to exclude the top 5 per cent of individual and household incomes.
And the good news continues – President Biden hopes to double the maximum value of the Pell Grant, effectively making the cost of attendance (and that) at two year community college (broadly equivalent to a foundation degree at an FE college) free.
Sounds good, doesn’t it? To put everything in context, it is worth going through how university level study is financed in the US.
Uncle Sam to the rescue
Students in the US fund their study through a mix of grants, loans, and savings or other income. If a US citizen is considering college, federal student aid is the first point of call – prospective students and their families complete the Free Application for Federal Student Aid (FAFSA) as a way in.
These federal schemes are in the main means-tested, and the amount awarded will vary based on the “cost of attendance” of your chosen college, the amount it is calculated your family will be able to contribute.
The Pell Grant, for example, is available for undergraduate study to students with financial need who can demonstrate the ability to benefit from higher education. The maximum available per year is $6,495 – which can be paid directly to the university, to the student directly, or a combination of the two. More than 60 per cent of borrowers have Pell Grants.
You will have spotted that “cost of attendance” terminology above – COA does include tuition fees but also includes the cost of room and board, child-care, books and materials, transportation, fees incurred in arranging loans, costs related to a disability. Basically everything you need to be able to study is taken into account – unlike in the UK fees and “maintenance” are considered together. Registered providers have to publish this COA annually alongside a net price calculator – financial aid offered to a student cannot exceed the COA at that provider.
Federal student aid programmes include “need-based” streams like Pell Grants, FSEOG, and the Direct Subsidised Loan – but also include “non-need-based” stuff like a Direct Unsubsidised Loan and a Federal Plus Loan. Access to, and the amount of, the latter is determined by your chosen college, which takes into account the COA and what has been awarded so far.
Around 92 per cent of student debt comes from federal loans. However, not all students take out loans, federal or otherwise. With grants plus savings, or scholarships in some cases, a surprisingly high proportion of students appear to manage without. Others find that the funds available to them are not sufficient, and choose to take out private loans, which make up something like 9 per cent of all loans, by volume.
Student poverty and graduate hardship are widespread – Sarah Goldrick-Rab’s Paying the Price is not an easy read but it is an important one. Much like in England, assumptions around parental contributions are not always context sensitive, and the available funding does not cover the true costs of living as a student. Add in the complexity of the application process and you have a regime that takes the middle-class student as the normal and fails to support others adequately.
Not all accredited universities (there are numerous bodies in the US that accredit universities, so the number is vast and constantly in flux) are eligible for FAFSA-based student support. Smaller, private for-profit, providers – these often serve underrepresented groups and offer vocational courses – are seldom included, so prospective students need to arrange private finance. As Tressie McMillan Cottom documents in her superb Lower Ed, student borrowing is often arranged by the provider itself.
Private loans (either direct-to-consumer or paid directly to the provider) are arranged on commercial terms and usually need a guarantor. Loans like this are the fastest growing component of the student support sector.
The graduate experience of debt can also be immensely troubling even with public funds. Graduates can choose from several repayment plans for federal loans – the standard offer is a fixed repayments are not linked to income, but there are also graduated options (where the amount increases over time) and a pay as you earn approach capped at 10 per cent of “discretionary income”. These repayment plans also have an impact on if and when loans are written off – this can range from 10 to 30 years (a figure that is also linked to when you took your loans out, how much you have borrowed, and whether your loans were for undergraduate or postgraduate study). There is no repayment threshold – you start repayments six months after graduation, or six months after your attendance drops below a minimum level.
Graduates pay interest on loans – this is set based on the type of loan (postgraduate loans have a higher interest rate – currently 6.54 per cent – than loans for graduate study, which is currently 4.99 per cent – and a formula based on the value of a 10-year Treasury note.
Some graduates working in “public service” (federal, state, or local public sector, the military, and some kinds of not-for-profit organisations) qualify for early write off, and there is also a scheme for those who work as teachers.
There is the possibility of flexibility around federal loan repayments, either by changing (at no cost) between repayment plans or by requesting temporary relief in the form of deferment (pausing repayments) or forbearance (paying just the interest).
Why can’t the English?
Compare England – from 2024 students in England will be eligible for a standard fee loan of a maximum £9,250 a year for up to four years of study, with additional costs for expensive subjects covered by direct grants to institutions.
A (means-tested) maintenance loan of a maximum of £12,667 a year is available – the amount depends on whether you live away from your parents or in London, the length of your course) and how much your parents earn (via a calculation that has been unaltered since 2011). There are bursaries (grants) available for some subjects of study.
From 2024, repayments will start as soon as you are earning £25,000 a year (down from £27,295 currently) and will pause should your earnings drop beneath that. Repayments are capped at 9 per cent of income, and will continue for 40 years, or until the principal and interest (will be set to the RPI base rate, currently up to RPI plus 3 per cent) are repaid.
There’s no ability to vary the rate of repayment, pauses are automatic based on income, and there are no write-offs based on where you work (though some teaching positions offer a “golden hello” this is a cash payment). Other than age, loans can be demited only on proof of severe disability or death.
There is a lot to like about the US system, on the surface. Grants support many students, the total cost of participating in higher education is nominally taken into account in student finance, and the repayment system is flexible and responsive. And the fact that the US is making changes to the system to address graduate hardship and the rising cost of living – after previously altering the system in response to the Covid-19 pandemic – is genuinely cheering compared to England’s magic money twig.
For me the failures in the US are around regulation. There’s no real link between loan eligibility and the quality of provision (though there are plans to change this), and the COA at some very prestigious providers is eye-watering – meaning that there are financial as well as attainment bars to study. There is a long tail of provision that is not so much “low value” as actually fraudulent, much of which is outside of any meaningful regulatory oversight. (though Biden plans to publish lists of providers where graduates continue to have high levels of debt, which feels a bit LEO). The whole thing is complex to the point of self-parody – the sheer administrative work required of applicants and those who support them is vast, putting off many who would be eligible.
In England we’ve got the idea of regulation and quality assurance right (though there are many issues with how it is done – for more details on these issues please see every other article ever published on Wonkhe) but we’ve really dropped the ball on the responsiveness and use of student support, and almost wilfully ignore the full COA by fixating on tuition fees only. Our single repayment regime is good at responding to varying graduate income (with the downside that we’ve started becoming obsessed with graduate income in policy and regulation), but we underplay the progressive and contributory nature of the scheme to the extent that we have begun to dismantle those bits having failed to explain them for years. The design of the repayment scheme in England is good in that it automatically stops repayments if earnings fall below a threshold, but the shorter length of repayment and the flexibility in repayment terms that is offered in the US is something it would be interesting to look at adopting here.
Which regime would I rather be a student in? The cheap answer (on many levels) is the pre-1997 English version with grants and no fees. Currently both systems are offputtingly expensive, but in the US we are seeing some movement towards the interests of students and graduates, and the consideration of living costs is (while far from perfect) better than anything currently available in England. And – of course – in terms of fees, living costs, and the availability of grants as well as loans a good four year state university (for in-state students) currently works out cheaper than four years of the traditional UK university experience. For Jonathan Simons, the sheer complexity of the US system makes him lean in the other direction. It’s certainly arguable either way.