The Australian this morning is giving a lot of attention to this paper by Neil Warren and Richard Highfield on HELP repayment.

It is a good paper, analysing ‘bunching’ of HELP debtor incomes below important repayment thresholds. The significance of this (for both the government and the debtor) is that if the debtor’s income crosses one of the thresholds they have to pay a higher percentage of all their income in repayment.

This has turned out to be a valuable aspect of HELP’s repayment system compared to those of other countries, where students pay at the margins (eg 9% of income above the threshold). In Australia, anyone who consistently earns above the initial threshold (about $53K this year) is likely to eventually repay all their debt, as they will pay back $2,000+ each year. But in other countries, earnings slightly above the threshold result in only very small repayments. This is one reason that, bad as Australia’s student doubtful debt figures are, they are not as bad as England’s.

However, because crossing a threshold has a high cash cost there are temptations to keep income below it. I have to admit that long ago I considered turning down a pay increase because I thought it would reduce my take-home pay more than I can afford, as someone who at the time had a very tight financial situation. In the end, what was to my boss a generous increase boosted my take-home pay by some token amount (and of course sped up my HECS repayment). What Highfield and Warren present is evidence that some people are using deductions for education, work and charity to bring their taxable income below thresholds.

Their policy suggestion is to change the definition of HELP repayment income so that some or all of these deductions are not included. This is a strategy the government has adopted before to tackle negative gearing and fringe benefits. I need to think more about the education and work deductions, but support removing charitable deductions (the taxpayer would still get the deduction for income tax purposes).

Another suggestion is to revisit the issue of discounts for paying student contributions upfront. The discount was cut from 25 per cent to 20 per cent in 2005, and then to 10 per cent in 2012, with a bill to eliminate it entirely stalled in the Senate. Money never lent will never cause repayment problems, so this has an obvious attraction – if the savings from the reduced lending outweigh the discount’s cost.

However, I am not convinced that the discount is having a big enough effect in encouraging up-front payment to warrant keeping it. The proportion of students paying upfront is in long-term decline, as seen in the chart below. The halving of the discount in 2012 did cause the biggest year-to-year decline in upfront payment in this time series, but it really only sped the trend up, rather than marking an obvious major turning point. We are talking perhaps about 1 to 2 extra percentage points of students paying upfront if they had a stronger financial incentive.

Cutting the discount has been based in part on the assumption that many of the people paying upfront are not principally motivated by a financial calculation. They are parents paying for their kids, employers paying for their staff, or individuals who don’t want to hold debt even on very low interest rates. Overall, the government is probably better off trying to collect the full student contribution amount via HELP than giving windfall gains to people who will pay upfront anyway.

While it has always made sense to borrow under HECS or HELP, due to the very favourable lending conditions, I am not entirely sure why we are seeing such a strong trend. An increasing share of low SES students might explain some of it, but I suspect there is more going on.

In The Australian this morning, Melbourne University VC (and my former boss) Glyn Davis has an op-ed saying:

As the 2011 Lomax-Smith report made clear, there is no consistent principle guiding public and private contribution to university study. A law or economics student pays about 83 per cent of the cost of their education while students in other disciplines enjoy a much larger public subsidy. This is not fair.

I have no dispute that the current system of setting overall funding rates and student contributions is untidy. It is the accumulated result of ad hoc decisions going back 25 years. There has been no careful empirical work to ensure that either funding rates or student payments reflect clear funding principles.

That said, I do not believe that the current principles for setting student contributions are inherently ‘unfair’. When different student contributions for different courses replaced previously flat HECS rates in 1997, the stated rationale was the new fees would reflect a mix of private benefit and course costs.* The higher the private benefit, the higher the student charge, with some but not primary acknowledgement of course cost. If course cost is not the major factor in setting the fee, it is not clear that calculations based on course cost denominators tell us much. The implied denominator for a private benefits approach is future earnings or some other measure of private advantage.

The reason law and economics student pay most of their course costs is their high private benefits/low course costs combination. But the idea behind differential HECS was to get a more even outcome on a student costs/graduate private benefits calculation.

I think one interesting way to look at this is to calculate how many years it takes graduates in different disciplines to repay their HELP debt. Based on 2011 census data, we think it would take a median male graduate about 10 years to repay their HELP debt. The chart below shows that even though law students pay high fees, they are estimated to take less time than average to repay, because their salaries are higher than average. Business graduates are estimated to take 11 years, a little above average.

From an egalitarian perspective, something like this system means that graduates across the disciplines put in more similar work effort to repay their debts than a system in which their subsidies are a more consistent percentage of course costs. For example, if we had a 50:50 public/private funding system law graduates would get higher subsidies and take less time to repay, despite already being on the shorter side of the median. Science students would get lower subsidies and take more time to repay, despite already having an above-median repayment period. It was counter-intuitive outcomes like these that sunk the Lomax-Smith recommendation of a 60:40 public/private split.

From a public benefit subsidy perspective, the current system also has some merit. In this analysis, students make some calculation of private benefits (financial and non-financial) from a course and compare these with the costs (also financial and non-financial). If we want to encourage more people to take education generally or particular courses via subsidies we can alter private financial benefits to make them more attractive. But if private benefits are already high, we don’t need subsidies at all or to the same extent. This means that we can charge students in high private financial benefits courses more, regardless of cost.

To reiterate, this is not a defence of the detail of the current system. But there are good reasons not to be too worried about what numbers we get from a student contribution/total course costs calculation, and to look at other rationales for setting student charges.

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* I am using ‘course costs’ a bit loosely here; the calculations are actually student contribution/Commonwealth-supported student funding rate. The funding rate is typically around the actual costs, but this varies between disciplines and institutions.