Monthly Archives: November 2013

Will the new Student Start-up Loan save money?

Today the Liberals introduced legislation for Labor’s conversion of the Student Start-up Scholarship into a new income-contingent loan, the Student Start-up Loan.

Overall, its design is closely linked to the Higher Education Loan Program (HELP). However, people who take out SSLs will not have to start repaying until after they have repaid their HELP debt. Potentially, that is not for a very long time.

Experience with the former Student Financial Supplement Scheme, under which students could trade in $1 of income support for a $2 loan, suggest that there is significant adverse selection with income support loans.

From figures given during discussion of closing the SFSS down in 2003, I estimate that about $2.7 billion was lent between 1993 and 2003. The Department’s annual report for 2012-13 says that $1.8 billion is still owed, of which they class 63% as doubtful debt. Doubtful debt for HELP is estimated at 23%.

Presumably this is from a mix of people taking out loans they never expected to repay and income support entitlement being a proxy for other characteristics that put people at above-average risk of being bad debtors.

In this case, the Commonwealth can’t be financially worse off. This is a loan replacing a grant, so long as repayments exceed administration costs they will come out ahead.
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Does HELP kill price competition?

In The Australian this morning, Bruce Chapman returns to one of the few topics on which we disagree: whether there can be price competition under an income-contingent loan scheme.

“Price competition is not on because the behavioural responses are close to nothing,” Professor Chapman said. “Governments should set the fee where they think it’s fair.”

We need to be careful here in distinguishing different circumstances.

I think Bruce is largely right for the school leaver market and the yes/no decision as to whether to go to uni. This has been confirmed again by recent British experience. Despite a near tripling of average fees, demand from 18 year olds is at near-record levels.

But that is not the same as saying that prospective students do not take price into account in comparing similar programs. The figure below compares MBA costs at different unis in the Melbourne and Sydney markets (Melbourne’s MBA is very expensive, but its pricing structure is so confusing that I have not included it on annualised basis). There are fairly predictable patterns based on reputation and prestige. But Deakin, RMIT, UTS and UWS get themselves into the market by charging more affordable fees.

MBA fees

It has to be true that HELP fosters higher fees. As with any loan system, it increases the number of people with enough capital to buy. But that does not mean that particular institutions will not compete on price. Strict price control is unlikely to be desirable, because it puts less-prestigious unis at a competitive disadvantage and limits scope for product innovation.

To me the policy question is whether supporting the very high fee courses with HELP is sensible investment in human capital, or whether it is just supporting largely wasteful status competition between universities.