The Australian‘s higher education gossip column yesterday reported some (anonymous) objections to our plans to change HELP’s repayment system.
Some of these are based on the belief that HELP debtors are in a special category who should be treated much more generously than their contemporaries who did not do quite so well at school. For reasons outlined earlier in the week, I do not think this is a convincing point of view.
But there are some more interesting points about repayment times:
A reader contacted us to say it would “perpetrate some asymmetries in the system”. How? “Not all graduate jobs begin with the same salary and not all jobs have the same prospects for wage increases over the working life of a graduate. These two parameters (starting salary and wage trajectory) have a dramatic effect on repayments.” Indeed and both would much more dramatically impact women than men, no doubt.Our reader astutely pointed us to the UK’s loan repayment calculator which from which we can see an investment banker might pay of their debt in 12 years 5 months while someone in sales would take 18 years 11 months to pay off the same debt. Graduates on really low wages (teachers, child care workers, social workers) would take more than 30 years and still have 45 of their debt overhanging because of the power of interest. With a 30 year debt forgiveness model, doubtful debt in the UK looks set to skyrocket…. Our reader says it would be helpful if the Grattan Institute or some other interested body produced a similar modelling tool so we could look at the long-term effects of such proposals.
A loan repayment calculator website that helps students understand their repayment obligations is an excellent idea. However, the analogy with England doesn’t work for either the current HELP system or what we propose in our report. There are some important differences:
Underlying borrowing. In England, most undergraduate courses are a flat £9,000 a year. Given different occupational earnings, that inevitably produces very wide variation in projected repayment periods. In Australia, student contributions are roughly linked to likely future earnings. Admittedly, the amounts are based on a back-of-the-envelope calculation made 20 years ago, and need an update. But work we’ve done before suggests that it tends to cluster by-discipline repayment times much more around the median than would a system based on flat fees, costs, or a fixed proportion of costs.
Interest rates. In England, there is a 3% real interest rate, here it is zero except for the minority of students charged loan fees. But Australia’s system means that compounding interest is a minor issue for debtors compared to England. There, slow repayment can substantially increases the real value of the debt; here it won’t.
Repayment system. In England, debtors repay 9% of their income above the threshold. Here, at each threshold you repay a percentage of all your income that increases depending on how much you earn, from 4% to 8% now. Because their threshold is lower than Australia’s (coincidentally, about the $42,000 we suggest for here) more lower-income debtors make some repayment. But except for English debtors earning below the Australian threshold, this leads to lower annual repayment than here, as seen in the slide below from our report:
Point of write off. The English write off debts after 30 years if the debtor is still alive. Here it is only on death. Australia will get more repayment from women returning to full-time paid work after they finish their main childcare period.
So high original debts, slow repayments, and real interest on the debt all join to produce long repayment times in England, with the consequent higher risk of doubtful debt exacerbated by premature write-off of debt.
Under the new thresholds we propose in our report (including lower upper thresholds), Australian repayment times would be reduced. That would be the only effect for the vast majority of higher education HELP debtors, who will eventually repay even under the current system. Their total costs stay the same in real terms, and slightly decrease in nominal terms as they will incur less indexation of their debt.
A proportion of additional repayment will be from people who might not otherwise repay. As the report and associated coverage note, most of the personal debt holders in these cases will be female, but the actual effects are likely to be much more gender neutral. In our analysis, it is long-term part-time work by second-income earners that comes out as a major doubtful debt risk, and having some of those debtors repay 3% of their income in HELP repayment will reduce this. However, the repayment will be much less than 3% of household income, and the effects will in practice be shared by usually male partners and children. Using HILDA for analysis, the singles affected are 58% female, which is almost exactly their share of the student population.