Category Archives: Income and wealth

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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A degree and net worth

Last Friday the ABS put out their latest report on household wealth and wealth distribution. This includes average ‘study loan’ debt, though there is nothing in the ‘assets’ section on the value of human capital. This is not a criticism of the ABS; human capital is not a directly tradeable asset and there are substantial methodological issues in valuing it.

Nevertheless, for most younger people their human capital is their most important asset. If what we are hoping to measure is capacity to command resources over the longer term (superannuation is included), then excluding human capital gives a fundamentally misleading idea of how wealth is distributed.

Combining numbers from two tables gives us an idea of what impact this has. The highest average HECS debt is in the households with the lowest net worth. Unfair! Students impoverished by debt! But looking at average HECS debts by gross household income quintiles things are reversed – the highest average HECS debt is in the top income quintiles. Equity! The rich being forced to pay their way!

What I suspect is happening here is that the net worth numbers are picking up many new households, graduates starting to earn good salaries but still renting and with little superannuation. But the household income numbers are picking up graduates living together; since they tend to overtake the incomes of non-graduates early in their careers putting two or more graduates together in a household gives them high collective earnings.

Because there are very large life cycle effects in wealth distribution, it will always be far more equal over a lifetime than at any one time. HECS/HELP will make it mildly more progressive.