Should you only repay HELP debt if you get a financial benefit?

Not surprisingly for an Opposition in an election year, Labor is opposing the recommendation of my latest report to lower the initial HELP threshold from $54,000 to $42,000.

These are the reasons they give:

The income contingent loans scheme (HECS-HELP), introduced by Labor, is based on the principle that you repay your contribution only if you benefit from your education in the way of higher salaries.

It is not a loan scheme as is understood in financial circles, but a social insurance program.

These arguments have their origins in the 1988 Wran report, which recommended the creation of HECS, but they don’t sit easily together. A social insurance program implies some relationship to other social insurance programs, while higher salaries implies relationship to some other counter-factual income, above what the graduate could have earned if they did not continue with their education. Given Australia’s means-tested welfare system for working age people, which is designed to make welfare financially unattractive compared to work, the two arguments are in inherent tension.

In practice, neither benchmark has been actively used to set the threshold. The current threshold is around $20,000 above the minimum wage and common social security programs. But at $54,000 in 2014-15, the threshold is below all persons average weekly earnings (the original Wran suggestion) of about $59,000. The threshold was last re-based in 2004-05 (we have the historical thresholds in an appendix to the report), but since then has increased by 17 per cent in real terms, as although not set according to average weekly earnings, it is indexed to movements in average weekly earnings.

Even if we accepted Labor’s financial benefit principle, it is not at all clear how it should be implemented. What is the counter-factual for financial benefit? Should it be age-adjusted? Should we have a different threshold for diploma borrowers? Should it be based on household rather than personal income? So far as I can see, while several people other than Labor have offered the financial benefit idea since the report was released, none have attempted to think through how it should be set.

Our report argues that ‘we should not turn HELP features that are based on political judgments of their time, or on assumptions that no longer apply, into principles that cannot be overturned’. Like most Grattan reports, it is at least an implicit argument against status quo bias, against all the rationalisations that attach themselves to existing policy arrangements, and an attempt to think about what a policy should be trying to achieve, and whether that can be done in a better way.

The average weekly earnings idea was a by-product of the late 1980s politics involved in ending free (to the student) higher education. But it sets HELP debtors up in quite a privileged position compared to other people being protected from financial hardship by the government, and we should ask why. The most obvious answer is that we need to protect people from financial risk to attract them to higher education. That’s an empirical issue, but nobody has shown that the current threshold is the right one from that perspective. England and New Zealand now, and Australia in the past, have all had lower thresholds without significant demand-side issues. Until recently, the barrier to higher education participation has always been the supply of places, not demand for them.

In the absence of a strong principled or empirical argument for the current repayment system, threshold reform is an element of moving HELP towards focusing subsidies on debtors with long-term low household income, ie social insurance. This keeps the justifiable element of Labor’s argument, while leaving open the idea of reducing the initial repayment threshold.

  1. Lower thresholds are both efficient and fair. Unlike other possible
    cuts to education spending, expenditure on HELP can be reduced
    without damaging its vital education and social policy goals.

    Comparing the HECS threshold to Newstart is silly, no-one can live in Sydney or Melbourne on the dole. It’s not a huge problem if dole recipients have to leave, it is a huge problem if graduates with jobs have to leave, indeed it totally defeats the whole point of subsidizing education in the first place if you’re forcing graduates to live away from graduate jobs.

    Realistically most single graduates earning $43,000 are already experiencing severe housing stress. Rather than targeting budget savings at those that can least afford it the government should simply reduce the CSP subsidy, which isn’t nearly so regressive.

  2. Andrew Norton

    Newstart is too low, which was one reason for a proposed threshold that was well above it. To have a reasonable living standard in a big city on $42K personal income you need to share, which on our analysis using HILDA is what mostly occurs, with 75% of HELP debtors earning between $42K and the current threshold living with a partner, their parents, or in a group household or with other relatives.

    • No doubt the majority would be fine because, as you say, the majority live in high-income households. My thoughts relate to those in sharehouses, a typical set-up might be something like $700 rent for 3 people (sharehouses usually needing to be close to public transport because students often don’t have cars, and having as many bedrooms as occupants).

      Levying an extra $1300 from these people might genuinely alter their behaviour (and where they choose to live) by making their current living arrangements unaffordable. In my opinion it’s a far bigger danger than altering the demand for degrees which as you rightly point out seems largely impervious to these sorts of things.

      A CSP cut might not be the best long-term solution (especially because there’s also HELP debt for vocational students) but it’s vastly more equitable.

      Also I’m not sure the current threshold is entirely arbitrary, or at least it’s a fortunate coincidence that it’s set to starting graduate salaries. Lowering it to $42,000 is exclusively capturing people who have derived no benefit from their degree and who are already struggling.

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