Should higher education providers be responsible for HELP doubtful debt risk?

I’m glad that Liberal Democrat Senator David Leyonhjelm is pushing the government to look at HELP doubtful debt. But I’m not convinced that the policy response discussed in a letter from Christopher Pyne to Senator Leyonhjelm is the right one.

Like several similar suggestions in the last year, the latest proposal aims to make universities partly responsible for student debt. Universities are encouraging students to take HELP loans, while transferring all the risk to students and taxpayers. It seems only fair that universities take some of the risk themselves.

As reported by Fairfax Media,

Mr Pyne proposes “a mechanism to make a proportion of each higher education provider’s direct grant funding contingent on its performance against a key set of indicators” – including the debt not expected to be repaid (DNER) by their graduates.

There are several kinds of risk factors related to student debt. As Grattan’s doubtful debt report showed, projected repayment rates differ by course. Someone with a medical degree earns more than someone with an arts degree, for instance. Other risk factors relate to personal characteristics. Men, for example, are more likely to repay than women because they spend more years in the full-time labour force, on average. Higher-ATAR students are more likely to finish their degrees and probably get higher paying jobs. There are macroeconomic risks, where recessions or periods of slow growth mean that repayment rates decline (as is happening now). Then there are risks associated with particular providers, in how well they prepare their students for work and how much they do to help them find jobs.

It only makes sense to penalise higher education providers for repayment issues they can reasonably foresee and do something about. There probably are things they can do to make their graduates more employable, although nobody knows what long-term impact these have. In Mapping 2014-15 we did not find major differences between types of university for employment levels, although we did find salary differences. But I expect it is going to be fairly difficult to identify a unique provider effect at the required level of confidence, amidst all the many factors affecting employment outcomes.

Providers could offer fewer places in non-vocational degrees, or degrees leading to occupations that appear over-supplied in the labour market. But in a fee deregulated market its not clear why providers wouldn’t factor the doubtful debt cost into the fees charged, knowing that this is an expense they share with their competitors.

Targeting personal characteristics is complicated, because some risk factors such as being female are protected under anti-discrimination law. Plus the government is saying that they would take account of equity factors such as gender. Charging lower fees that women have a better chance of repaying before they leave full-time work is a non-discriminatory way of targeting this doubtful debt risk. However, as with course-related risks it is not clear why providers would not charge high fees, knowing that some of the profits need to be set aside to later fund a doubtful debt levy. This is especially the case because they won’t want to charge males lower fees just because females have a higher doubtful debt risk.

Low ATAR or other forms of academic disadvantage aren’t protected by anti-discrimination law, and of course this is the most common form of discrimination in the higher education system. But with low SES students being over-represented among those with low ATARs, a policy that encouraged general discrimination against low ATAR students would run contrary to equity goals and policies. We are far better off tackling the low-ATAR problem directly, rather than encouraging action via doubtful debt penalties.

Repayments are affected by macroeconomic conditions, but we should not penalise providers for circumstances they probably can’t predict and certainly can’t avert.

If we are going to move to assessing students for their risk of doubtful debt – a major conceptual change to HELP – we should not do it via providers. They are never going to have as much information about lending risk as the government itself. The government can access huge amounts of information to assess likely repayment prospects. Pyne’s letter to Leyonhjelm also proposes linking ATO and Education Department data, something that should have been done long ago, and which will allow a far more nuanced understanding of who is likely to repay. Adding in social security and immigration data would help too.

The government also has much better incentives than the providers. After all, if a HELP debtor doesn’t pay back all the money left outstanding is the government’s loss. The higher education provider is only putting a share of their money at risk, and as noted above there will still be incentives to take on high-risk students.

I don’t think we should rule out a more individualised approach to HELP lending. Arguably, in VET FEE-HELP and parts of the higher education market the government is currently an irresponsible lender, letting people take on debts that aren’t in their interests. But if we are worried about HELP doubtful debt, as we should be, there are things we can do that are easier, faster and will save much more money. Regular readers you have heard it all before, but:

* Lower the first threshold (in the defeated bill);
* Index all the thresholds for repayment by CPI instead of AWE. This would speed up repayment, which is important due to women departing full-time work in their thirties.
* Remove the write-off of debt on death. Our report on this last year concluded that much of the debt written off will be held by women in higher-income households, who will have estates that can easily repay.
* Require repayment from overseas debtors (although this is probably small for doubtful debt).
* Introduce loan fees (like those currently applying for some students) to encourage upfront payment. Money that is never lent cannot turn into doubtful debt.

For some reason, complex ideas that only indirectly tackle problems seem to be winning favour at the moment over simple ideas that directly tackle problems. Making higher education providers responsible for HELP doubtful debt risk is another of these.

  1. Andrew – I hold some doubts around whether your logic holds up in the future world of undergraduate fee liberalisation. It’s hard to see how the principles you outlne would make a dent at very high levels of student debt for graduates that are not in the labour market for sustained periods in high earning roles. Even at moderate levels of debt there may be risks around repayment rates for programs in some providers where employment outcomes are not part of the value proposition. As you say – there is the risk of unlawful discrimination if fundng were linked to repayments, and it is a complex work around to a perceived problem. However, if there were evidence that a particular group of debtors associated with specific providers had very high rates of bad debt it is legitimate to question their access to public funds and support. At this point there is little public evidence to guide policy in this space. Whilst not advocating for this approach – if there was evidence of a problem (as there clearly is in VET) – perhaps it could be a TEQSA risk indicator rather than part of financing policy?

  2. Matt – I am not sure which section of the post you are responding to. But if we are talking about individualised lending, it would be an analysis that said ‘we don’t think you will be in the FT labour force long enough to repay that amount of debt’, therefore we will not lend it it you. Elderly persons would be the most obvious case.

    As this is invidualised lending, it would take account of money already owed. So even if a particular course was generally low risk, in the context of the debtor’s outstanding debt they might still be deemed high risk.

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