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MODEL BEHAVIOR

Economist Robert Gordon says the UK and Australia hold a solution to the US student loan crisis

By Matt Phillips

Maybe he was playing to the crowd, but in a lecture at the London School of Economics last month (around the 55-minute mark), Northwestern University economics professor Robert Gordon spotlighted an interesting policy prescription for combatting America’s student debt problem.

“About the escalation of college debt, I think we need to move toward a British or Australian system of income-contingent repayment of college debt,” said Gordon, widely considered one of the foremost experts on US economic productivity. “So that you don’t have to repay debt if you’re unemployed or engaged in a low-paying social service activity.”

Rising student debt loads have become an increasingly high profile issue over the last decade, as the outright level of student debt outstanding more than doubled from roughly $450 billion to more than $1.25 trillion, driven by both rising costs and attendance.

Gordon is widely considered one of the foremost experts on US economic productivity. His nod in London to America’s growing student debt problem came in the context of policy prescriptions he laid out to address the decades-long decline of US labor productivity.

The productivity of labor, defined roughly as GDP per hour of labor, is the key to real economic growth and improvements in standards of living over time. In his magisterial book The Rise and Fall of American Growth, Gordon lays out the long history of how the high US standard of living was built upon bursts of labor productivity stimulated by new inventions, massive investments by both the public and private sectors, and an increasingly educated and productive workforce.

But since the 1970s, US productivity growth has slowed sharply. And that trend is set to continue, Gordon argues, because of declining birthrates, less-earth-shattering inventions, and other headwinds such as rising inequality and an educational system that is failing to produce workers who are as productive as they’re needed to be.

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Surging college costs and debt levels exacerbate already established problems for both inequality and education, Gordon argues in his book. “During most of the postwar period, a low-cost college education was within reach of a larger fraction of the [US] population than in any other nation thanks to both free college education made possible by the GI bill, and to minimal tuition for in-state students at state public universities and junior colleges,” he writes. “The United States led the world during most of the last century in the percentage of youth completing college.”

Importantly, Gordon doesn’t call for free higher education, a policy that has become a central plank of Democratic presidential hopeful Bernie Sanders’ insurgent campaign. Instead, Gordon points to so-called income-contingent-based repayment as a solution. The Obama administration introduced income-based repayment plans in the US in 2009, but those programs have had trouble gaining traction. Some 4.6 million recipients of Federal Direct loans had signed up for income-related repayment plans through the end of the first quarter of 2016, but that’s only about 15% of the total number of US Direct Loan borrowers.

A recent report from the OECD spotlighted such repayment systems, saying “Australia and New Zealand can be considered good examples of this model and have used this approach to mitigate the impact of high tuition fees, encourage disadvantaged students to enter tertiary education, and reduce the risks of high student loan indebtedness.”