Category Archives: Student loans

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.
*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.

Polling on the initial HELP threshold

A headline in The Australian this morning reads “Student loan: Poll backs current repayment threshold”.

In a American-style voting system where the largest single minority wins, I guess that’s right. The current threshold is $54,126, and 27% of respondents chose the nearest $10,000 increment of $50,000 (slide below).


But another way of looking at it is that half of all the sample, and about two-thirds of those who offered a view, came up with a number below the current $54,126. The 2014 Budget proposed reducing the threshold to $50,638. Nearly a quarter of respondents offered a number below the $42,000 we recommended in our report last week.

According to The Australian‘s article respondents were not told the current threshold. If they had been, I expect that there would have been stronger status quo bias. Still, for an issue that has not been prominent until recently I think these poll results are reasonably good, from a reformist perspective.

The poll was conducted by MetaPoll. No precise details on the methodology were published, although younger people were less in favour of a lower threshold than older people.

Student debt repayment times: England compared to Australia

The Australian‘s higher education gossip column yesterday reported some (anonymous) objections to our plans to change HELP’s repayment system.

Some of these are based on the belief that HELP debtors are in a special category who should be treated much more generously than their contemporaries who did not do quite so well at school. For reasons outlined earlier in the week, I do not think this is a convincing point of view.

But there are some more interesting points about repayment times:

A reader contacted us to say it would “perpetrate some asymmetries in the system”. How? “Not all graduate jobs begin with the same salary and not all jobs have the same prospects for wage increases over the working life of a graduate. These two parameters (starting salary and wage trajectory) have a dramatic effect on repayments.” Indeed and both would much more dramatically impact women than men, no doubt.Our reader astutely pointed us to the UK’s loan repayment calculator which from which we can see an investment banker might pay of their debt in 12 years 5 months while someone in sales would take 18 years 11 months to pay off the same debt. Graduates on really low wages (teachers, child care workers, social workers) would take more than 30 years and still have 45 of their debt overhanging because of the power of interest. With a 30 year debt forgiveness model, doubtful debt in the UK looks set to skyrocket…. Our reader says it would be helpful if the Grattan Institute or some other interested body produced a similar modelling tool so we could look at the long-term effects of such proposals.

A loan repayment calculator website that helps students understand their repayment obligations is an excellent idea. However, the analogy with England doesn’t work for either the current HELP system or what we propose in our report. There are some important differences:

Underlying borrowing. In England, most undergraduate courses are a flat £9,000 a year. Given different occupational earnings, that inevitably produces very wide variation in projected repayment periods. In Australia, student contributions are roughly linked to likely future earnings. Admittedly, the amounts are based on a back-of-the-envelope calculation made 20 years ago, and need an update. But work we’ve done before suggests that it tends to cluster by-discipline repayment times much more around the median than would a system based on flat fees, costs, or a fixed proportion of costs.

Interest rates. In England, there is a 3% real interest rate, here it is zero except for the minority of students charged loan fees. But Australia’s system means that compounding interest is a minor issue for debtors compared to England. There, slow repayment can substantially increases the real value of the debt; here it won’t.

Repayment system. In England, debtors repay 9% of their income above the threshold. Here, at each threshold you repay a percentage of all your income that increases depending on how much you earn, from 4% to 8% now. Because their threshold is lower than Australia’s (coincidentally, about the $42,000 we suggest for here) more lower-income debtors make some repayment. But except for English debtors earning below the Australian threshold, this leads to lower annual repayment than here, as seen in the slide below from our report:

England repay

Point of write off. The English write off debts after 30 years if the debtor is still alive. Here it is only on death. Australia will get more repayment from women returning to full-time paid work after they finish their main childcare period.

So high original debts, slow repayments, and real interest on the debt all join to produce long repayment times in England, with the consequent higher risk of doubtful debt exacerbated by premature write-off of debt.

Under the new thresholds we propose in our report (including lower upper thresholds), Australian repayment times would be reduced. That would be the only effect for the vast majority of higher education HELP debtors, who will eventually repay even under the current system. Their total costs stay the same in real terms, and slightly decrease in nominal terms as they will incur less indexation of their debt.

A proportion of additional repayment will be from people who might not otherwise repay. As the report and associated coverage note, most of the personal debt holders in these cases will be female, but the actual effects are likely to be much more gender neutral. In our analysis, it is long-term part-time work by second-income earners that comes out as a major doubtful debt risk, and having some of those debtors repay 3% of their income in HELP repayment will reduce this. However, the repayment will be much less than 3% of household income, and the effects will in practice be shared by usually male partners and children. Using HILDA for analysis, the singles affected are 58% female, which is almost exactly their share of the student population.

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.

Labor supports reducing HELP costs

In a surprise move, Labor has agreed to back abolition of the 10% discount for paying student contributions upfront and the 5% ‘bonus’ for voluntary repayments of HELP debt.

For reasons we don’t fully understand, the proportion of people paying upfront has been in decline for a long time, as the chart below shows. Halving the discount in 2012 accelerated a long-term trend but was not a major turning point. The government will hope that the latest change will not dramatically affect the numbers, as borrowing has costs and risks for them.

Previous research has suggested that many of the upfront payments are from parents wanting their kids to be debt free, so perhaps the final abolition won’t make much of a further difference. Indeed, discount abolition may already be partly evident in the data, as anecdotal evidence suggests many people believe it has already been abolished, following on from the original publicity in 2013 when Labor first proposed it (to pay for Gonski; they later reversed their support saying the Coalition was not meeting Gonski commitments, before going back to their original position today).

Source: Department of Education Student liability statistics, various years

Any further decline may be due in part due to expanded eligibility for HELP loans. Currently New Zealanders and permanent residents are entitled to a subsidised place have to pay student contributions upfront, but soon some long-term NZ residents will be able to take out HELP loans.

Abolition of the 5% bonus for voluntary repayments is a sensible move. Previous ATO data suggested that it was mostly used by people towards the end of their repayments anyway, when the government would be better off just waiting a little longer and getting the full face value of the loan.

Removing the bonus will also weaken an incentive to borrow under FEE-HELP. Some students can borrow unnecessarily and then repay ‘early’ (ie pay the full amount much later than they could have) and use the bonus to pay less than the face value of the loan. I did this a few years ago to draw attention to this rort. I’m glad it is finally going to be abolished.

Hopefully this signals that Labor is taking HELP’s costs seriously. There is plenty more to do.

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.


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.