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.

Also, I expect that take-up of the loan will be well below entitlement to it from receipt of student welfare. The Start-up Scholarship was a windfall gain introduced by the previous government, payable to people getting very little income support (due to parental or personal income tests) and to middle-class people getting Youth Allowance because they had reached the age of ‘independence’ (22), despite still living with their parents. They were all happy to take free money, but I doubt they will be so keen on taking it if they have to fill in extra forms and pay it back later.

Whatever the take-up rate, the SFSS experience is a warning that we need to be cautious about extending HELP to income support more generally, despite the theoretical attractiveness of the idea. The savings from converting the Start-up Scholarship to a loan may not be as large as hoped.

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A couple of other things:

On my reading of the legislation, students who drop out after 35 days can still keep the loan.

I think there is a new ‘saving’ (or at least one I cannot recall being announced). The $1,025 twice a year loan will not be indexed until 1 January 2017.