Monthly Archives: October 2015

Is the HELP deceased estate write-off a ‘design feature of the policy, not a bug’?

Over at Catallaxy, Sinclair Davidson does not agree with my proposal to recover HELP debts from deceased estates:

Okay so here is the story: Young lady goes to university and meets and marries a high-flyer who earns oodles of money. She raises the children and never works (or works very little) and never pays off her HECS debt. It is really hard to get excited about this issue: people who don’t work or never earn over the repayment threshold are not liable to pay back the HECS – that is a design feature of the policy not a bug. Perhaps some other features should have been included in the HECS design at the time. But as things stand the policy is working as designed and as intended.

This was one of the issues we encountered when writing our report on HELP doubtful debt. Is income contingent repayment the principle behind HECS (or HELP, as it became) or a mechanism for implementing other policy objectives?

The main policy goal at the time was to raise revenue to expand higher education in a way acceptable to the Labor Party, in which many people regarded Whitlam’s free higher education as a major achievement. The Wran review appointed to justify this change made much of the private benefits of higher education, noting that these went disproportionately to the more privileged members of society.

Income contingent repayment, with a threshold at $54,000 now, means that relatively poor people do not have to pay, preserving free education for them. But everyone else has to repay a part of the cost of their education. Income contingency provides risk management for debtors, avoiding the dangers of financial hardship. There is also an income smoothing element to it compared to flat annual repayments, with payments increasing with income.

In my view, risk management and income smoothing are the principles, and income contingent payment the mechanism. The principles restrain but do not abolish the goal of controlling government spending.

The death write-off was never essential to these principles. As risks go, being dead is already as bad as it gets. And while I am no expert on theological theories of the afterlife, I don’t think any of them foresee use of the $A. Income smoothing is no longer required. And the write-off is undoubtedly contrary to the fiscal goals in establishing HECS.

I am not entirely sure why the death write-off was included. We know from released Cabinet documents that the ATO was worried about maintaining records over long periods of time, and bureaucratic resistance to the work involved may have been a factor. They probably thought that the amounts raised would be small, not realising that much of the HELP doubtful debt would be in high-income households. And there would have been political considerations around the small number of young people who die each year with HECS debts. The ATO chasing the $500 in their bank account would not have been a good look.

In our Grattan report, we solve the latter issue by suggesting a $100,000 asset contingent threshold. Anyone owning a house or a share in a house will have that much on death, and we think that will include significant numbers of HELP debtors, but not most young people with HELP debts.

The current write-off policy delivers windfall gains to the beneficiaries of the estates of HELP debtors. Many of these will be the adult children of educated, affluent households in which their mother stopped working or went part-time after they were born. They are not likely to be especially needy members of society. Adding HELP repayments to whatever other debts the estate has is a fair way to reduce HELP’s costs.

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Sinclair’s Catallaxy post assumes the only expense of the write-off policy is the actual write-offs each year. As he says, this cost is not high (they stopped publishing statistics a few years ago, but as of mid-2011 only 10,000 of the 2.7 million people who had ever taken out a HELP loan had died without fully repaying). But each year the Budget includes an expense for lending that year that is not expected to be repaid. In recent times, it has been around $1.5 billion a year.

Why was HECS renamed HELP?

The Australian‘s higher education gossip column High Wired has a suggestion for new higher education minister Simon Birmingham:

HW’s first policy suggestion to Birmo is please reverse the stupid decision to rename HECS as the Orwellian sounding HELP scheme. Can we please go back to HECS? Thank you.

After ten years of HELP I still routinely have to explain that it is like HECS, showing that the HECS brand is very resilient (and still partly there, through HECS-HELP). On the other hand, the shift from HECS to HELP was more than just a re-branding exercise. It reflected the evolution of policy.

Under the original HECS the terminology was mainly about the new payment that students had to make, a Higher Education Contribution. Students accumulated a Higher Education Contribution debt if they chose to borrow the money. HECS ended up describing both the charge and the loan, even though they were two different things.

Even before HELP, there was an accumulation of things students could borrow for on an income-contingent basis but were not ‘contributions’ to the cost of government-subsidised university places: for postgraduate full-fee courses, for OUA courses, and bridging courses for migrants. They all had different names, although the debts were added together for repayment purposes. From 2005 the government decided to also make income contingent loans available to students at non-university higher education providers and for study overseas. Since then, we have added loans for some vocational education students and for the student amenities fees. None of these additional loans are for ‘contributions’ either.

So the decision to call the charge for a government supported place a ‘student contribution’ and to give the loans a single name, the Higher Education Loan Program or HELP for short, seemed to clarify and simplify what was going on (at least until they started lending for non-higher education activities).

In practice, however, there is a lot of confusion. Even people making otherwise reasonably well-informed comments about higher education get the names of the loan schemes muddled. Perhaps it is time to bring back ‘HECS’, as a brand-created word in its own right rather than as an abbreviation, to describe the loan scheme. We could then try to insist on ‘student contribution’ for the charge that can be either paid upfront or borrowed.