Category Archives: Student loans

A high HELP repayment threshold increases pressure to restrict or deny access to HELP

The Department of Education and Training’s 2016-17 annual report announced the first public use of a project to link up the ATO’s HELP repayment data with the Department’s enrolment data:

In 2016–17 the department worked with both the Australian Taxation Office and the Australian Government Actuary to create a database that links education courses with
income and occupation information. In 2018, the QILT website will publish graduate income data sourced from this database, which will inform students of the earning potential in their study area.

This will, of course, be very interesting, and could include income by university attended, as well as by study area. This has been done in the UK, although their QILT equivalent does not use it at this point.

But this data linking work is being done to better understand HELP debt and which factors affect repayment. It has potential uses well beyond student advice, uses that would fit a pattern of the government trying to reduce its risk of bad HELP debt.

The most obvious of these is to restrict access to courses with high rates of non-repayment. This was a feature of the VET Student Loans reform so that

loans are only being provided for courses that are closely aligned to the skills employers need in their workplace, thereby enhancing the opportunities for graduates to work, and to repay the money lent to them by taxpayers. [emphasis added]

Read more »

Some students could lose FEE-HELP by accident or no fault of their own

In supporting the government’s Education Legislation Amendment (Provider Integrity and Other Measures) Bill 2017 in the House of Representatives yesterday, shadow universities assistant minister Terri Butler said ‘Labor supports greater protection for students, particularly those accessing the FEE-HELP system’.

The provider integrity bill would put some extra constraints on the marketing activities of non-university higher education providers (NUHEPs), whose domestic students typically use FEE-HELP (because they are denied access to the Commonwealth supported places that would let them use HECS-HELP).

But the provider integrity bill also exposes NUHEP students to new risks, and greater risks than students in the university system.

If a student in a public university fails most of their first year subjects, they will probably be sent to their institution’s unsatisfactory progress committee. But whether they continue with their studies will be an academic decision that can take a holistic view of the student’s circumstances.

Under the provider integrity bill, a NUHEP student using FEE-HELP – there were 46,000 of them in 2015, although students enrolled before 1 January 2018 will be grandfathered – will lose FEE-HELP eligibility if they fail too many subjects, and have to pay upfront fees unless they can demonstrate that there were special circumstances that were beyond their control, did not have their full impact until after the census date at which they incurred their HELP debt, and made it impractical to complete the unit. Read more »

England and Australia: two higher education income contingent loan systems with very different consequences

The recent debate about student debt in England was triggered by this very interesting paper from the Institute for Fiscal Studies. I have used some of their analysis to think about how their situation differs from Australia’s, despite both having income contingent loans.

1) Total tuition costs. As I noted in my post last week, tuition charges are higher in England than in Australia, with most courses a flat £9,000 per year, or about $15,000 on current exchange rates. Australian annual student contributions this year range from $6,349 (arts, education, nursing) to $10,596 (law, medicine, commerce). The British pound has a low exchange rate at the moment; if we use $US purchasing power parity English courses are between 1.7 and 2.9 times more expensive than in Australia.

The high English tuition fees are partly because there are no tuition subsidies offsetting them in many courses, while all undergraduates at public universities in Australia receive tuition subsidies. But it is also because of their flat fee system, which means that students in low-cost fields are charged more than the total cost of their course.

While undergraduate courses are cheaper in Australia than England whichever way we compare them, in Australia we don’t have a good understanding of how HECS-HELP debt for undergraduate courses is interacting with FEE-HELP debt for postgraduate courses. But further study in full-fee courses is likely to be one reason why we are seeing strong growth in total HELP debts above $50,000. Read more »

HELP is not a profit-sharing scheme

In today’s Oz, John Bryon argues against lowering the HELP repayment threshold by arguing that HELP is a profit-sharing scheme:

HECS (by whatever name) is not a loan so much as a profit-sharing scheme: the commonwealth not a bank but a venture capitalist. The public finances education for its own collective benefit, both economic and social.

It is rational to recruit potential students as widely as possible; it is also expensive.

So those deriving conspicuous personal benefit are asked to tip some of those dividends back in, up to a limit based on their time (and, today, disciplinary location) within the system.

It is unjustified to lower the repayment threshold below the average wage.

Now there are versions of income contingent payment scheme ideas which can be seen as profit-sharing. Milton Friedman’s original idea was along these lines, in which people pay a percentage of their income for a fixed period of time. Some people would pay nothing for their education, while financially successful graduates could pay many times their original fees or costs of their course. In theory, this could permit a high threshold, if the lender was confident that total repayments would at least cover costs.

But HELP isn’t a profit-sharing scheme. It is a partial cost recovery scheme, in which the most the Commonwealth can ever receive is the amount that it lent plus indexation (or loan fee, for some FEE-HELP students). Recovering costs in a labour market where many people work part-time means that the initial threshold cannot be high, and indeed it is relatively low in other jurisdictions that have income-based repayments such as New Zealand, England, and some US loan schemes.

The partial link with average weekly earnings in Australia was about the late 1980s politics of ending free higher education and probably a view that it wasn’t going to be hugely costly, given that at the time average wages was much less driven than now by people who didn’t have degrees (in 1989 10 per cent of workers had degrees, now it is 30 per cent). It was never a mechanism for profit sharing.

The non-ether origins of a $42,000 HELP repayment threshold

The Australian‘s High Wired column reports on an exchange between education minister Simon Birmingham and his Green shadow Sarah Hanson-Young on how the government’s proposed $42,000 threshold for HELP repayment was set:

The Greens’ Sarah Hanson-Young was in her element in Senate Estimates yesterday. First up, she wanted to find out where the $42,000 new HECS repayment threshold came from. ‘Plucked out of the ether’ was the answer she was looking for. Which she didn’t get, but the Grattan report on reducing the HECS threshold was mentioned. (And where did that figure come from? Plucked out of the ether, maybe.)

The $42,000 figure was proposed in this Grattan report released in March 2016. There is no science that says exactly what the initial HELP repayment threshold should be. There is always going to be some policy and political judgment involved. But our report did make a non-ether case for a substantial lowering of the initial threshold, which at the time the report was released was based on policy and political judgments made in 2003 (the base level) and 1993 (AWE indexation).

In the intervening years just from 2003, HECS had become HELP and turned into a very different, and much larger, program – with many more students in the core public university undergraduate programs, thanks to the demand driven system, and many extensions of income contingent loans – to higher education students outside the public university system, to diploma students in vocational education, OS-HELP, SA-HELP and other loan systems such as for student income support that use the same basic repayment system.

Total HECS/HELP lending more than tripled between 2003 and 2016, and the risk of non-repayment also substantially increased as we brought in debtors with weaker earnings prospects than was the case with a smaller, more educationally elite, group of eligible borrowers.

It’s sometimes said that the threshold should be high to provide a financial benefit before repayment is required. Arguments like that were made in the late 1980s, and have stuck in popular understanding of HELP. But it is not clear that there is any principle behind this idea. In our report, we argue for seeing HELP in the context of other government income protection programs, rather than a special, very generous deal that graduates should receive for unclear reasons. $42,000 is still a bit on the high side by that standard, but we took into account previous Labor statements that $40,000 would be too low. We want a stable system, so looked for a threshold that Labor would at least keep in office, even if it opposed it on introduction.

So while $42,000 is not pure science, unlike the current threshold it is based on something more than long ago policy decisions made with different circumstances in mind.

Effective marginal tax rates and HELP threshold reform

Media reports in the last few days have pointed out that some women face effective marginal tax rates above 100% under proposed changes to the HELP thresholds. But this is not new – the nature of the HELP repayment system is that for every HELP debtor, male or female, there are income zones that reduce take-home pay.

This is because as income reaches each threshold the debtor must repay a percentage of his or her entire income. Under the current thresholds, a debtor earning $54,868 in 2016-17 will repay nothing. But someone earning $54,869 will repay nearly $2,200. So up to an income of about $57,000 HELP repayments mean the debtor takes home less money than if he or she earned $54,868.

Of course, in most cases the debtor’s long-term financial position is not worse as their HELP debt is reduced. In this sense, HELP repayments are different from the welfare benefit phase-outs that normally contribute to high effective marginal tax rates – for the debtor, that is money lost to consolidated revenue, rather than improving their personal balance sheet. But for people concerned with immediate cash flow more than their long-term financial position, HELP repayments can cause problems.

Research by Richard Highfield and Neil Warren shows that HELP debtors manipulate their taxable income to avoid or delay repayment. They also make the point that this is costly for income tax revenues, even if the HELP debt is eventually repaid. Read more »

The boom in HELP debtors

The latest ATO taxation statistics come out today, giving us some new information on HELP.

Although growth in higher education student numbers moderated in 2015, VET FEE-HELP was still out of control in the period covered until mid-2016, contributing to a substantial increase in total debtor numbers. They grew by nearly half a million (a 24% increase) between 30 June 2014 and 30 June 2016. With big policy changes in vocational education taking effect in 2016 and 2017, along with continued moderate growth in higher education numbers, the rate of growth should slow substantially in the year to 30 June 2017.

On current policy settings, however, the number of debtors repaying is not likely to accelerate rapidly. Only 22 per cent made a repayment in 2013-14 and the number is likely to to be lower still in 2014-15 (there is a 2014-15 number in the chart, but these have a history of significant upward revision due to late tax returns, so it is too early to say exactly what proportion made a repayment).

The 2014-15 repaying share is likely to be lower because of the number of people who are still students, the high initial repayment threshold of nearly $55,000 a year is delaying repayment for recent graduates, and a large proportion of VET FEE-HELP borrowers are unlikely to earn enough to repay.

There is speculation that the initial threshold for repayment will be reduced in the Budget. These numbers explain why the idea needs considering.

Loan fees and the expert panel

As I expected, there has been comment (here, here, or here) about my release of a report on HELP student loan fees at the same time as I am on a government higher education policy advisory panel.

Due to the panel consuming my time for the last couple of months, the loan fee report has appeared later than originally intended. But other than that the report’s release follows a plan developed a year ago to complete reports on two weaknesses in HELP’s finances, the thresholds for repayment and interest costs. They are companion reports for our report on doubtful debt and recovery of HELP debt from deceased estates in 2014.

Loan fees are not new, and nor is my support for them something I suddenly arrived at after being appointed to the panel. I said in response to the proposed Pyne reforms that rather than abolishing loan fees we should extend them. What this week’s report does is work through in more depth whether interest subsidies are necessary to income contingent loan schemes (no); the relative merits of real interest, hybrid real interest and CPI indexation, and loan fees (loan fees better); and arrive at a method for setting a loan fee rate (likely interest costs over the life of HELP loans). It’s the detail that is appearing now, not the broad recommendation to use loan fees.

When the government asked me to be on the advisory panel I said I could only do it if I could also meet my existing Grattan commitments. They agreed to this. The panel is providing private advice to the minister and the department. It is a different situation from a review with a final report I need to agree with my panel colleagues and which the government will publicly accept or reject. So while the timing is not ideal, the loan fee report does not pre-empt other people’s decisions.

Should people use their superannuation to pay off HELP debt?

For some time former Liberal adviser John Adams and Senator Chris Back have been promoting the idea of using superannuation to pay off HELP debt. Adams put his case on Catallaxy last year, and Senator Back is in the AFR again today on the subject. At The Conversation, Geoff Sharrock has a different take on the same idea, proposing that annual superannuation payments by employers be diverted into meeting that year’s HELP repayments.

You would have to be a bit desperate use superannuation, on which you can reasonably hope to earn a 5-10% a year rate of return on average, to pay off a debt with 2-3% interest. But the proposals are about cash flow, not long-term financial advantage. Any HELP debtor who earns the repayment threshold has to repay more than $2,000 a year, and someone on $100,000 a year will have to repay at least $8,000. While people on these incomes are not poor by general community standards, they could reasonably regard their current needs as more important than additional wealth or consumption in the future.

There is good evidence that people manipulate their income to stay below the HELP repayment threshold (see for example figure 22 on page 40 of our recent report), even though many of them probably will repay eventually. So there would probably be some demand for trading in super for repaying HELP. The Sharrock plan is likely to have more voter appeal than the Adams plan, which will only have the desired effect for debtors who have enough accumulated superannuation to clear their entire debt (as HELP repayments are only based on current income, not outstanding balance*). Most new bachelor-degree graduates will have too little in their super accounts to clear the $20,000 to $40,000 they will typically owe after completing an undergraduate degree, but as Sharrock shows the 9.5% of income annual compulsory superannuation investment is always higher than the compulsory HELP repayment.

But should the government allow superannuation to be used in this way? The two big issues are whether superannuation should be diverted from its core retirement savings purposes, and whether it will save the government money as well as being more convenient for debtors.

Adams is aware of the criticisms, particularly around the long-term impact on retirement income. He says people could be required to make up the contributions later. As with HELP repayment on family income, this would be complex to administer and enforce. It needs a counter-factual amount that would have been saved, and a plan for how it is going to be reached. Sharrock just observes that in his plan most graduates would still have decades of work ahead of them. In part, how big an issue this is will also depend on the level of HELP debt.

Perhaps the bigger danger to retirement savings is the precedent using superannuation for HELP would set. While people who have not been to university don’t have HELP repayments, they do on average have lower incomes, so it is hard to say that HELP debtors have any unique cash flow issues (apart, perhaps, from those created by lifestyle expectations). Adams provides an intellectual differentiation between using HELP for other purposes, such as buying a house, and using it to repay HELP. But inevitably the details would be lost as other people tried to free their superannuation savings for more urgent uses.

The other big question is the effect on the government’s finances. There is value to the government in earlier repayment of HELP debt through lower interest subsidies, and possibly in reduced doubtful debt (although people who think they might not repay in full will be less likely to use their super for early repayment). But the government will lose the taxation it would receive on superannuation funding earnings. Super for HELP also seems open to rorting, by salary sacrificing into superannuation and then using the money to repay HELP debt. It would be a back door way of restoring the bonus for repaying ‘early’ that will otherwise be abolished next year. Many years in the future, there may also be additional issues with people whose super savings are too low for retirement who end up having to rely on government payments.

While I do want HELP debt to be repaid more quickly, on balance I don’t think diverting money from superannuation is the way to do it.
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*Unless HELP repayment is completed during the year.

Should HELP repayments be based on family income?

The Fairfax papers this morning have stories on a ‘push’ to repay HELP debtor from family income, in which I am quoted extensively. This idea is considered in our latest Grattan report on lowering the HELP threshold for individual debtors, but we did not propose it.

The appeal in the idea is that our analysis suggests that many HELP debtors who are not currently repaying, and likely a much larger proportion of debtors at risk of never repaying, live in reasonably affluent households. The reason they are not earning more than the $54,000 threshold is that they don’t need to, because another family member makes enough money that the household can maintain reasonable living standards without two full-time earners. It’s a little hard to read, but the slide below from the report shows the disposable (ie after tax and with non-taxable benefits) income of the households affected by our proposed $42,000 threshold. That’s not the whole situation – it excludes households where all HELP debtors earn less than $42,000, or over $54,000. But it illustrates how personal HELP debtor income is not a good guide to overall personal living standards.

family income

While repaying HELP from family income would make a big difference, it was not recommended for a range of reasons:

* How would we determine whether a couple was a couple for HELP repayment purposes? There are some clear potential markers, such as marriage or kids. But only about half the 20-something graduates who were living together as a couple in the 2011 census were legally married. What if you were legally married but had split?

* It would make life more difficult for employers, who currently deduct most HELP repayments. Now they can use their own payroll; in future they would have to know spouse or partner income as well. More people would make incorrect repayments during the year, and could be hit with major additional repayments at tax return time.

* Who would be legally liable to pay? Presumably it would have to be the debtor, with an assumption that partners would often choose to cover it. But that could mean people getting bills that exceed their income. If the principal income earner refused to pay, it would mean that HELP caused default, which it is not supposed to do. If the principal income earner was forced to pay, it would be an unusual case of someone becoming liable for debts they never took out.

While I would not say we should never, ever, consider a different basis for calculating repayment income, for this report I thought there were too many practical and philosophical issues for it to make the list of recommendations.