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.

3 thoughts on “The beginning of the end for no-questions-asked student loans?

  1. Hi Andrew

    I note with interest that in my reply to your previous post, I suggested the Government exploit the ATO’s wealth of HECS data to support the student i.e. by identifying universities/courses with the best graduate outcomes. However in your recent post you suggest using the same data but shifting the focus to the student i.e. identifying which types of students appear to represent the greatest financial risk. I believe this is a slippery slope and against the principles of equality of opportunity and access, as it could lead to students being excluded from higher education on the basis of their social background.

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  2. Tim – That depends on whether SES has predictive value, which on most of the data to date it lacks, other than as a weak proxy for prior academic achievement.

    This also goes to one of the issues raised in the demand driven review, and why we proposed abolishing the low SES target. The target implies that we should aim for some number arrived at independently of the interests of the people involved, which I think is a mistaken idea. If someone is at high risk of ending up with a HELP debt but no qualification they should at minimum be told, and possibly be prevented from incurring debt that is more likely to harm them than help them.

    I don’t think HELP needs to be run on a commercial basis. As a matter of policy, it would be possible to take risks a bank would not. But we need to be much more explicit about the risks and costs, and make decisions accordingly.

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  3. That said, I think one of the weaknesses of putting all responsibility on the providers is that they would probably have to use crude proxies, which may not reflect actual risks or policy priorities.

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