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.

What’s going on in the new graduate labour market?

Late last year the mainstream media picked up on the graduate un/under-employment story. At Grattan we have been doing a bit more work to see what is going on.

One of the things we wanted to look at whether the poor employment outcomes were driven by more graduates, as the 2009 and onwards enrolment boom students finish their courses, or a declining labour market, or both.

We have published completions data, but there is no published time series of the number of recent graduates with jobs. What we’ve done is taken the proportion of recent graduates with full-time jobs in the Graduate Destination Survey as a share of the completions number. To the extent that the GDS is an imperfect sample our numbers are likely to be a little wrong, but I doubt this will affect the trend.

As can be seen in the slide below, both supply and demand factors are affecting outcomes. The graduate labour market peaked in 2007, when nearly 61,000 new bachelor graduates found (or already had) full-time jobs. In 2013 and 2014, just over 52,000 new bachelor graduates had full time jobs about four months after completing their degrees.

recent grad employ and complete

There seem to be two shocks to the employment market. The first was the onset of the global financial crisis, with was felt most strongly for the 2008 completing students, with a decline of 7 per cent in the number of graduate jobs on the previous year. Perhaps surprisingly, there was a slightly bigger shock in 2013, with a 7.6 per cent decline on the number of jobs in 2012. One reason it was worse in 2013 is that big health fields which had been little affected by the 2009 downturn declined significantly. This is consistent with fewer health occupations appearing on the skills shortage list (p. 68).

While graduate employment opportunities have trended down, the number of domestic bachelor degree completions has trended up, by 17 per cent between 2008 and 2014. Given there are still some big student cohorts enrolled in our universities, the number of completions will only increase in the next few years. Unfortunately, we cannot have the same confidence about full-time jobs for recent graduates.

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.