Category Archives: Student loans

Fewer new graduates will start repaying their HELP debt

In the mid-year Budget update, the government predicts that repayments of HELP debt will slow down. Unsurprisingly given recent posts on graduate employment, I think that’s right. Fewer graduates have any significant source of income.

What I have not written about so far is what graduates are paid if they have a full-time job. What the latest graduate employment outcomes data shows is that median starting salaries were essentially the same in 2014 as in 2013, at $52,500 a year (for graduates aged less than 25 in their first full-time job). That means that graduate salaries are going backwards in real terms. The HELP thresholds, however, keep being indexed according to average weekly earnings, which are still going up.

Unless there is a surprising surge in salaries paid to new graduates, this means that the median graduate who completed at the end of 2014 will not make a HELP repayment even if he or she has a full-time job. The slide below has the trends in starting salaries and initial HELP repayment thresholds.

starting salary and threshol

An implication of this is that, at least for younger graduates (older graduates are more likely to already have jobs, or employment histories that get them better-paying jobs*), is that few of them will begin HELP repayments in the months after graduation. Overall, only 42 per cent of the graduating cohort from 2013 have a full-time job, down from 56 per cent in 2007 and 2008. If the median starting salary slips below the initial HELP repayment threshold, fewer than half of that group will make a repayment. This suggests that around one in five new graduates will earn enough to start repaying their HELP debt.

Presumably these trends informed the 2014 Budget decision to lower the initial HELP repayment threshold to $50,638, which would require many more new graduates to start repaying, at the rate of 2 per cent of their income. But it is not clear why the Budget went for a once-off cut to the initial threshold, rather than changing the indexation system from average weekly earnings to the consumer price index. The government proposed this change for much more politically sensitive welfare payments.

Originally, the HECS thresholds were indexed to CPI, but were changed to AWE in 1994. Which it is has major implications for repayment levels. In our doubtful debt report, we showed that if the initial threshold had been indexed to the CPI rather than AWE it would have been $44,836 in 2013-14, rather than its actual figure of $51,309. Although we did not model the other thresholds, using CPI rather than AWE could significantly speed up repayments by bringing people into higher repayment categories earlier in their careers.

* In 2013, graduates aged above 25 or above with previous full-time employment experience had a median salary of $58,000.

Release of the 1988 HECS Cabinet documents

The 1 January release of old Cabinet papers has put on the public record the original submission that led to the creation of HECS.

As Julie Hare reports in The Australian, some of its issues are still current today. The Department of Finance wanted a real interest rate on HECS debt, and the Pyne reform package’s original proposal that this be implemented suggests that they have been consistent over the last 25 years on this point (it was in the leaked 1999 reform submission as well).

The issue of doubtful student debt is not so prominent, but it is alluded to in a related Expenditure Review Committee document. The ATO, concerned about the bureaucratic implications of maintaining records for decades, wanted to close HECS accounts that had recorded no changes for extended periods (10 years was suggested). This was opposed by both the departments of Education and Finance, with the latter saying that the issue was evidence of the need for faster repayment requirements and the real interest rate to provide an incentive to repay. They did later get faster repayments, with the initial rates of 1%, 2% & 3% of income (depending on earnings) soon replaced with higher rates, and progressively increased over the years to the current range of 4% to 8%.

There are a few ideas in the documents that were not pursued. Waiving indexation of HECS debt of people out of the workforce for long periods due to unemployment or invalidity was to be investigated. I suspect that this was rejected on feasibility grounds – there is a lot in these documents about the complexities of implementation, down to such detail as the need to upgrade the ATO’s air conditioning before the necessary IT equipment could be installed. If a variable is not in the existing ATO systems, it is very hard to have policy based on it.

A proposal to not charge HECS in the first year of university to students who had been on AUSTUDY or ABSTUDY in their last year of school was also dropped. The Department of Prime Minister and Cabinet suggested that this could undermine the argument that the loan scheme alone could deal with equity concerns, and lead to lobbying from other groups for exemptions. They thought we should wait and see if there was a problem with demand from this group. They made the right call on this, as subsequent research has not shown socioeconomic background in itself be a significant factor in price sensitivity.

At the Conversation, Gwil Croucher discusses some of the other considerations revealed by this release.

As Christopher Pyne is finding, higher education reform is hard. These Cabinet documents provide some insight into the background of a big reform that was implemented and, in modified form, survives.

The beginning of the end for no-questions-asked student loans?

The Australian this morning is running stories on the likely increases in doubtful HELP debt* and crackdowns on lending through VET FEE-HELP, which principally lends to students taking vocational education diploma courses.

Industry minister Ian Macfarlane (the Australian must have been sitting on this story, as Chris Pyne become the responsible minister in the pre-Xmas reshuffle) is said to have:

…blasted “criminal’’ training colleges for recruiting elderly students from retirement homes to cash in on taxpayer funding.

Mr Macfarlane said the federal government would take action early next year to stop training companies and brokers offering free iPads to “suck in’’ students who are unlikely to graduate.

Under the proposed measures, some of the government payment to colleges would be withheld until the student found work. This has parallels with the ‘gainful employment’ rules proposed in the United States to deal with similar problems there.

While obviously measures should be taken to reduce rorting, bad provider practices highlight deeper problems with HELP loans. Income-contingent lending has been expanded many times since HECS was introduced in 1989 without anyone going back and thinking carefully about the lending or repayment systems.

In 1989 higher education was still a relatively elite activity and graduates a relatively small proportion of the workforce. Recent graduate un-or-under-employment was only a third of what it is now. To a significant extent, the admission requirements for university could double as a creditworthiness check. The income contingent loan scheme largely acted as a genuine risk manager, rather than handing out mislabelled subsidies to people who were never likely to repay.

Now higher education participation is heading towards 40 per cent of the age cohort, and HELP has been extended to vocational education. Higher education students with lower ATARs are significantly less likely to complete their degrees, leaving them with a HELP debt but without significantly enhanced income-earning potential. People with vocational education qualifications on average earn significantly less than higher education graduates, and more importantly for HELP are much less likely to earn more than the repayment threshold (pp 20-23). Admission to a course is no longer a good proxy for ability to repay.

During 2014 several people have suggested that institutions enrolling students using HELP should share some of the risk of non-repayment (eg Judy Sloan and Core Economics bloggers). The proposal to making some provider payments contingent on student outcomes looks like the first sign of this becoming reality. However, this may not be the best solution.

While vocational and higher education providers could use their own data to develop sophisticated analysis of what types of students are most likely to drop out, they are much less well-placed to assess employment outcomes for those who complete. Former students are under no legal obligation to answer employment surveys. By contrast, the government as the HELP lender has vast amounts of information. Tax file numbers are used for both HELP borrowing and tax collection, what matters for HELP repayment. Linked back to Education Department records, this data could also be used to produce sophisticated analysis of repayment risk.

Arguably, under current arrangements the government is not being a responsible lender. Good lending practices in the financial sector protect both the lender and the borrower from imprudent decisions. Neither protections are currently robust for HELP. Asking some more questions about repayment prospects before lending under HELP could be good for many prospective students, and good for taxpayers who face ever-increasing bad student debt.

* Using Grattan projections based on a mix of official figures and extrapolations from historic data.

Should uni students pay a fixed share of total course costs?

In a Conversation article today, Louise Watson revives an idea from the 2011 base funding review (on which she served): that the government and students should each pay a fixed share of the total funding rate for the course the students take. She says:

The wide variation in subsidy levels from 16% to 71% of total course costs is the product of incremental political decisions made by previous governments. Pyne’s proposal to cut government subsidies by 20% across the board does not address these anomalies. It would be fairer if all government subsidies met the same percentage of course costs, regardless of discipline, even though this would cause an increase in some students’ HECS liability.

In the base funding review a 40 per cent student/60 per cent government ratio was suggested; in today’s article Watson refers to a National Commission of Audit suggestion of 45/55.

My Graduate Winners report was a detailed critique of this idea from the perspective of using higher education subsidies to produce public benefits.

But I don’t think the fixed ratio idea is much better from Watson’s perspective of fairness to students. Under the current system, student contributions are mostly based on presumed private benefit from a degree, with a nod to cost differentials in delivering courses. This is how we get apparent anomalies – law has high private benefits but low delivery costs, and therefore the student contribution is a high percentage of the total funding rate.

While the private benefit categorisations are old and were always rather back-of-the-envelope, their practical effect is to even out the number of years it takes to repay a loan. The chart below shows, using 2011 census data, how long it would take male graduates to repay their HELP debt, if they were earning the median income for someone with a bachelor degree in their discipline.

HELP repay

Under the current student contribution system, most repayment times are clustered around the overall average of 10 years.

Under the base funding review flat rate subsidy recommendations, science and agriculture would become much more expensive, even though they already have relatively long repayment times. Law and IT would become cheaper, even though their graduates are already relatively quick to repay. It’s not obvious to me how this improves on fairness.

These issues arise because although we spend more than $6 billion a year on the main tuition subsidy program, nobody knows exactly why. But I think the main practical effect of this spending is that it shortens student debt repayment times, and keeps them clearer of the cash-constrained child-rearing years. This is one of the main things I take from this year’s debate on fee deregulation – while the arguments were often under-developed, people were expressing concern about women carrying debt while they were out of the workforce with kids, and about delays in the capital accumulation needed to enter the property market.

The current student contribution system helps with income smoothing, with graduates eventually paying via high marginal tax rates later in their careers. By causing already long repayment times to extend further, and already short repayment times to reduce still more, the Watson proposal would work against this policy objective.

HELP and vows of poverty

On Twitter I was challenged on the religious colleges point, that there was a difference between being eligible for FEE-HELP loans and directly receiving tuition subsidies. Having just checked the census income numbers, looking at ministers of religion and graduates of ‘religious studies’, it seems that in this case there may not be so much difference between the two.

In 2011, the year of the last census, the threshold for repayment of HELP was an annual income of about $47,000. Unfortunately that does not neatly fit with the census income categories, falling into one with the range of $800-$999 a week.

The slide below shows incomes for ministers of religion, with 47 per cent definitely earning below the threshold (the bars show the cumulative percent of ministers), with another 16 per cent in the income range including the threshold.

ministers of religion

The results for people with degrees in ‘religious studies’ are even worse. For this group, 56 per cent earn less than threshold and another 12 per cent have an income in the the threshold’s income range.

religious studies

By contrast, for graduates generally 34 per cent are clearly below the threshold and another 12 per cent have an income in the threshold range.

There are many people who are below the threshold in a given year who will still repay eventually, as they are temporarily out of the workforce or working part-time. But religious vocations are often characterised by the religiously-motivated forgoing of material luxury, and also payment-in-kind by the church, such as free or heavily subsidised accommodation. These factors are likely to put some ministers of religion below the threshold for their careers, despite working full-time.

This means that the effective costs of extending tuition subsidies to religious colleges is likely to be less than what I estimated yesterday, as some of the tuition subsidies will just replace debt that will never be repaid anyway.

What proportion of uni graduates leave Australia permanently?

In our Grattan report on HELP doubtful debt, we struggled to get long-term data on graduates leaving Australia. We were interested in this issue because currently there are no provisions for recovering HELP debts from graduates living overseas.

The latest HILDA Statistical Report doesn’t report on HELP debtors, but it does include information on people with a bachelor degree or above. Perhaps unsurprisingly, they are more likely than people with other qualifications to leave Australia permanently, as seen in the figure below.

emigration by level

Based on general emigration data, our report assumed that graduates with personal or family links to another country would be more likely to emigrate. HILDA confirms that this is the case, with people with both parents born in a non-English speaking country having three times the emigration rate as people with both parents born in Australia. However, 87% of people with NESB parents remained.

emigration by parent birthplace

Reflecting the general Australian population and the education focus of many migrant groups, nearly half of Australia’s domestic students in 2011 had at least one parent born overseas. While HELP debtors going overseas is a much smaller issue than the deceased estate write-off, these numbers suggest that it would be worthwhile to do more to recover HELP from overseas debtors. The Grattan doubtful debt report discusses some of the practical issues in doing so. Since the report was released, the government has said that it has had discussions with the English about mutual efforts to help collect student debt.

Parent birthplace 2011 students

Higher education reform clarifier #3: Would compound interest on HELP debt be new?

At a conference I attended yesterday there seemed to be some confusion about the government’s plan to index HELP debt at the 10 year bond rate, capped at 6 per cent, rather than at CPI. There was a lot of concern about introducing ‘compound interest’.

In the context of HELP, compound interest is the paying of interest on previously accrued interest added to a student’s debt. This has been a feature of Australia’s income contingent loans, HECS and then HELP, from the start. What’s changing is not the fact of compounding, but the rate of interest. Based on recent history, this is likely to be 1 to 2.5 per cent higher than now.

The main alternative to these variable real interest rates is a loan fee. Undergraduates borrowing under FEE-HELP pay a 25 per cent loan fee. This provides an incentive to pay up-front, avoiding the taxpayer subsidising interest payments on loans from people who have the cash to pay for their education, and contributing to the cost of interest. Upfront payment allows the government to avoid the risk of doubtful debt. However, once the loan fee is incurred it does not provide much incentive to repay early.

The government is removing the FEE-HELP loan fee. It was certainly unfair that full-fee undergraduates had to pay it, but not full-fee postgraduates. HECS-HELP borrowers also make no contribution to the cost of their loan other than the CPI interest.* But I am not sure that the idea of a loan fee should be dismissed. It makes the total cost of higher education more predictable for borrowers, and manages the risks of periods of earning less than the threshold for repayment. At the same time, a loan fee could substantially reduce the cost of HELP to other taxpayers.
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Higher education reform clarifier #1: Will NIDA students pay more?

The higher education reforms announced on Budget night are causing some confusion. Complex reforms are being added to an already complicated system. I am planning on a series of clarifying blog posts to explain what is happening, of which this is the first.

The SMH is running a story on prospective students concerned about fee hikes at the National Institute of Dramatic Art, NIDA.

NIDA is unusual in being subsidised out of the arts budget rather than the education budget. I can’t see anything in the relevant portfolio budget papers about whether NIDA has taken a hit to its funding.

This means that even though NIDA’s students are subsidised, they are classed as full fee by the HELP scheme and borrow under FEE-HELP rather than HECS-HELP. The higher education legislation does not regulate the tuition fees NIDA charges.

For FEE-HELP undergraduates, there is currently a 25% loan fee (eg, a student who borrows $10,000 will have a $12,500 debt recorded). This will be abolished, reducing the initial cost of attending NIDA assuming no further fee changes. However, students will in future be charged an interest rate based on the 10-year bond rate rather than CPI.

NIDA has typically pitched its fee around the level of undergraduate student contributions in comparable courses. If these increase at universities then it is possible that NIDA will see market space to increase its own fees. But there is nothing in the Budget higher education reforms that will require them to lift their charges.

The SMH article quotes 23-year old Oliver Wicks, soon to complete an arts degree, as reconsidering pursuing an education at NIDA due to potential increased cost. However, any increased fees are the least of his worries. As Grattan’s recent HELP doubtful debt report found, a high proportion of performing arts graduates don’t earn enough to start repaying.

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.