Category Archives: Student loans

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.

Pursuing the demand driven reforms without fee deregulation

According to media reports, new education minister Simon Birmingham is considering proceeding separately with extending the demand driven system to sub-bachelor courses and to higher education providers outside the public university system. Fee deregulation would be dumped.

This is the strategy I have been advocating for months. While it is not a certainty in the Senate, it at least has a realistic chance.

For the reasons outlined in the demand driven review, I believe that it makes policy sense. Politically, it offers a way for the Coalition to limit Labor’s higher education political advantage.

Labor has been going hard on higher education affordability. Yet Labor’s opposition to extending the demand driven system creates a contradiction in their policy. While campaigning strongly against a 20% cut to per student subsidies for students in public universities, they are happy for students in other higher education providers to get no subsidies at all. While campaigning strongly against deregulated fees in public universities, they are ensuring that students in other higher education providers stay in price deregulated courses. Under a revised Coalition package, accepting fee regulation would be the price higher education providers pay for entering the Commonwealth supported system.

From the Coalition’s perspective, the main internal obstacle to this strategy is paying for it. Under the revised package, extending the system would be less costly than as it was announced in May 2014. If higher education providers have to be able to manage within overall Commonwealth supported rates, fewer of them will enter the system. Work we did at Grattan last year (summarised in this Senate submission) estimated that about 60% of courses in non-university providers had total fees at or below Commonwealth supported rates, suggesting that entering the demand driven system would be viable. I don’t know how many students those courses have, but there would be fewer providers entering the system without fee deregulation.

Abandoning fee deregulation for public universities would also provide savings compared to the current forward estimates. There is a common misconception that fee deregulation saves the government money, but in reality it is expensive via HELP interest subsidies and bad debt. The government only saves money if it reduces public funding and replaces it with private funding within a capped system.

I am not opposed to reducing per student Commonwealth contributions to distribute the total pool of Commonwealth funding more fairly across higher education students. But the first priority for controlling higher education expenditure should be dealing with HELP’s costs. Senator Birmingham has made a good start with this through his VET FEE-HELP reforms.

Rather than abandoning loan fees, as proposed under the Pyne package, they should be levied on all students who borrow. There is a sort-of loan fee already for Commonwealth supported students. The discount for paying up-front is another way of saying there is a fee for not paying up-front. But this discount does not generate any extra revenue for the Commonwealth, and it needs to be converted to one that does. There are also a range of other desirable reforms to the initial threshold for repayment (in the original Pyne package), indexation of thresholds, and recovery from deceased estates.

Getting savings measures through the Senate is always more difficult than getting spending measures approved. But there now does seem to be a chance that the Coalition can make a positive higher education reform in this parliamentary term, while still getting higher education to play its part in controlling the deficit.

Getting overseas student debtors to repay

The promised legislation to recover HELP debt from people overseas was introduced today. In principle this is a good idea, with the main issue being how to implement it. As outlined in our Grattan doubtful debt report last year, both the UK and New Zealand experience significant difficulties in recovering student debt overseas.

We are starting well behind those two countries, because there is a basic problem in alerting people to the fact that they are obliged to repay. Because overseas repayment is a long-standing feature of the NZ and UK schemes, student debtors would have been alerted to their obligations when taking out a loan. Here it is widely (and correctly) believed that no repayment is needed while overseas, and it will take many years to correct that misconception, presuming that this bill gets through the Senate.

Existing overseas HELP debtors have until 1 July 2017 to notify the ATO of their situation. People leaving the country from 1 January 2016, with the intention of staying away for 6 months or more, will need to notify the ATO within 7 days of leaving. There is going to have to be a new departure card to warn people of this. I’m not sure how they will deal with people whose plans change while they are overseas. A change of mind will not be a valid excuse, as not supplying information to the ATO is an absolute liability offence, with a fine of up to $3,600.

Notification will be an issue with any requirement for overseas HELP debtors to repay. The other main issue is determining how much to pay. The UK has a complex scheme that tries to match the initial repayment threshold to living standards in other countries. After that, debtors pay 9% of their earnings above the threshold. NZ has flat repayments based on how much the debtor owes.

The proposed Australian scheme will rely on conversions of overseas income back to $A. Presumably there will have to be some $A value fixed in regulation to provide some certainty in advance as to thresholds. Debtors need to know roughly how much they will need to set aside for their repayment. However, given fluctuations in the $A there will still be some uncertainty about how much it will cost them in their local currency when the time comes to transfer the money. Debtors will be hoping that the $A stays low; bad luck if you are a HELP debtor during the next commodity price boom.

The minister’s media release indicates potential reciprocal arrangements with the UK and NZ on student loans, which may simplify things for debtors and increase compliance. However, in our Grattan report we reported on the locations of overseas graduates three years after completion. At that point, only about 30% were in the UK or NZ.

In the end, more draconian measures might be needed. NZ has the power to stop student debtors at the airport, although I don’t know if it has ever been used. The UK has the power to use legal action to recover all the debt at once, which would make legal action in overseas countries more feasible – it is not worth suing over a few thousand dollars in annual repayments, but could be to get tens of thousands. As most overseas HELP debtors are likely to return permanently, high penalty interest on the total debt might help. It would create an incentive to follow the rules while doing that stint in London, New York, Hong Kong or the many other cities that attract Australian graduates.

Corrected post: Most HELP debtors still owe less than $20,000, but big debts are increasing

The ATO personal income statistics provide information on how much debt students and former students are holding. Although debt levels are increasing, the vast majority of HELP debtors (71 per cent in 2012-13) still owe $20,000 or less.

The modal amount of debt is below $10,000, with more than 40 per cent in this category in all years. However, this is a poor guide to what the typical student will end up borrowing, as it includes people who are early in the borrowing phase and towards the end of their repayment phase (plus probably quite a few people who did not borrow much in the times when HECS was much cheaper, but have not repaid).

HELP debt levels

The share of HELP debtors owing more than $40,000 has increased from 3.5 per cent to 5.6 per cent between 2010-11 and 2012-13, or just over 100,000 people in 2012-13.

Fewer people are repaying their HELP debt

A few months ago I argued that flat graduate incomes and an initial threshold that was indexed to average weekly earnings was going to mean fewer graduates making a repayment. The 2012-13 taxation statistics that came out today shows that this is already a problem. The total number of people who made a HELP repayment that year dropped by over 2,000 compared to 2011-12, while the total number of debtors increased by more than 142,000.

Help debtors and repayments

The surge in enrolments since 2009 means that it is inevitable that a lower percentage of debtors will make a repayment, since it takes time for people to finish their courses and enter the workforce. But this is only the second time since HECS/HELP started in 1989 that the absolute number of people making a repayment went down, other than due to a deliberate policy shift (increasing the threshold for 2004-05). Total repayments did go up by $24 million, or about 1.6%.

The falling number of debtors making a repayment highlights again the need for a lower threshold and measures to reduce the manipulation of HELP repayment income.

Should higher education providers be responsible for HELP doubtful debt risk?

I’m glad that Liberal Democrat Senator David Leyonhjelm is pushing the government to look at HELP doubtful debt. But I’m not convinced that the policy response discussed in a letter from Christopher Pyne to Senator Leyonhjelm is the right one.

Like several similar suggestions in the last year, the latest proposal aims to make universities partly responsible for student debt. Universities are encouraging students to take HELP loans, while transferring all the risk to students and taxpayers. It seems only fair that universities take some of the risk themselves.

As reported by Fairfax Media,

Mr Pyne proposes “a mechanism to make a proportion of each higher education provider’s direct grant funding contingent on its performance against a key set of indicators” – including the debt not expected to be repaid (DNER) by their graduates.

There are several kinds of risk factors related to student debt. As Grattan’s doubtful debt report showed, projected repayment rates differ by course. Someone with a medical degree earns more than someone with an arts degree, for instance. Other risk factors relate to personal characteristics. Men, for example, are more likely to repay than women because they spend more years in the full-time labour force, on average. Higher-ATAR students are more likely to finish their degrees and probably get higher paying jobs. There are macroeconomic risks, where recessions or periods of slow growth mean that repayment rates decline (as is happening now). Then there are risks associated with particular providers, in how well they prepare their students for work and how much they do to help them find jobs.

It only makes sense to penalise higher education providers for repayment issues they can reasonably foresee and do something about. There probably are things they can do to make their graduates more employable, although nobody knows what long-term impact these have. In Mapping 2014-15 we did not find major differences between types of university for employment levels, although we did find salary differences. But I expect it is going to be fairly difficult to identify a unique provider effect at the required level of confidence, amidst all the many factors affecting employment outcomes.

Providers could offer fewer places in non-vocational degrees, or degrees leading to occupations that appear over-supplied in the labour market. But in a fee deregulated market its not clear why providers wouldn’t factor the doubtful debt cost into the fees charged, knowing that this is an expense they share with their competitors.

Targeting personal characteristics is complicated, because some risk factors such as being female are protected under anti-discrimination law. Plus the government is saying that they would take account of equity factors such as gender. Charging lower fees that women have a better chance of repaying before they leave full-time work is a non-discriminatory way of targeting this doubtful debt risk. However, as with course-related risks it is not clear why providers would not charge high fees, knowing that some of the profits need to be set aside to later fund a doubtful debt levy. This is especially the case because they won’t want to charge males lower fees just because females have a higher doubtful debt risk.

Low ATAR or other forms of academic disadvantage aren’t protected by anti-discrimination law, and of course this is the most common form of discrimination in the higher education system. But with low SES students being over-represented among those with low ATARs, a policy that encouraged general discrimination against low ATAR students would run contrary to equity goals and policies. We are far better off tackling the low-ATAR problem directly, rather than encouraging action via doubtful debt penalties.

Repayments are affected by macroeconomic conditions, but we should not penalise providers for circumstances they probably can’t predict and certainly can’t avert.

If we are going to move to assessing students for their risk of doubtful debt – a major conceptual change to HELP – we should not do it via providers. They are never going to have as much information about lending risk as the government itself. The government can access huge amounts of information to assess likely repayment prospects. Pyne’s letter to Leyonhjelm also proposes linking ATO and Education Department data, something that should have been done long ago, and which will allow a far more nuanced understanding of who is likely to repay. Adding in social security and immigration data would help too.

The government also has much better incentives than the providers. After all, if a HELP debtor doesn’t pay back all the money left outstanding is the government’s loss. The higher education provider is only putting a share of their money at risk, and as noted above there will still be incentives to take on high-risk students.

I don’t think we should rule out a more individualised approach to HELP lending. Arguably, in VET FEE-HELP and parts of the higher education market the government is currently an irresponsible lender, letting people take on debts that aren’t in their interests. But if we are worried about HELP doubtful debt, as we should be, there are things we can do that are easier, faster and will save much more money. Regular readers you have heard it all before, but:

* Lower the first threshold (in the defeated bill);
* Index all the thresholds for repayment by CPI instead of AWE. This would speed up repayment, which is important due to women departing full-time work in their thirties.
* Remove the write-off of debt on death. Our report on this last year concluded that much of the debt written off will be held by women in higher-income households, who will have estates that can easily repay.
* Require repayment from overseas debtors (although this is probably small for doubtful debt).
* Introduce loan fees (like those currently applying for some students) to encourage upfront payment. Money that is never lent cannot turn into doubtful debt.

For some reason, complex ideas that only indirectly tackle problems seem to be winning favour at the moment over simple ideas that directly tackle problems. Making higher education providers responsible for HELP doubtful debt risk is another of these.

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.