Over at Catallaxy, Sinclair Davidson does not agree with my proposal to recover HELP debts from deceased estates:
Okay so here is the story: Young lady goes to university and meets and marries a high-flyer who earns oodles of money. She raises the children and never works (or works very little) and never pays off her HECS debt. It is really hard to get excited about this issue: people who don’t work or never earn over the repayment threshold are not liable to pay back the HECS – that is a design feature of the policy not a bug. Perhaps some other features should have been included in the HECS design at the time. But as things stand the policy is working as designed and as intended.
This was one of the issues we encountered when writing our report on HELP doubtful debt. Is income contingent repayment the principle behind HECS (or HELP, as it became) or a mechanism for implementing other policy objectives?
The main policy goal at the time was to raise revenue to expand higher education in a way acceptable to the Labor Party, in which many people regarded Whitlam’s free higher education as a major achievement. The Wran review appointed to justify this change made much of the private benefits of higher education, noting that these went disproportionately to the more privileged members of society.
Income contingent repayment, with a threshold at $54,000 now, means that relatively poor people do not have to pay, preserving free education for them. But everyone else has to repay a part of the cost of their education. Income contingency provides risk management for debtors, avoiding the dangers of financial hardship. There is also an income smoothing element to it compared to flat annual repayments, with payments increasing with income.
In my view, risk management and income smoothing are the principles, and income contingent payment the mechanism. The principles restrain but do not abolish the goal of controlling government spending.
The death write-off was never essential to these principles. As risks go, being dead is already as bad as it gets. And while I am no expert on theological theories of the afterlife, I don’t think any of them foresee use of the $A. Income smoothing is no longer required. And the write-off is undoubtedly contrary to the fiscal goals in establishing HECS.
I am not entirely sure why the death write-off was included. We know from released Cabinet documents that the ATO was worried about maintaining records over long periods of time, and bureaucratic resistance to the work involved may have been a factor. They probably thought that the amounts raised would be small, not realising that much of the HELP doubtful debt would be in high-income households. And there would have been political considerations around the small number of young people who die each year with HECS debts. The ATO chasing the $500 in their bank account would not have been a good look.
In our Grattan report, we solve the latter issue by suggesting a $100,000 asset contingent threshold. Anyone owning a house or a share in a house will have that much on death, and we think that will include significant numbers of HELP debtors, but not most young people with HELP debts.
The current write-off policy delivers windfall gains to the beneficiaries of the estates of HELP debtors. Many of these will be the adult children of educated, affluent households in which their mother stopped working or went part-time after they were born. They are not likely to be especially needy members of society. Adding HELP repayments to whatever other debts the estate has is a fair way to reduce HELP’s costs.
Sinclair’s Catallaxy post assumes the only expense of the write-off policy is the actual write-offs each year. As he says, this cost is not high (they stopped publishing statistics a few years ago, but as of mid-2011 only 10,000 of the 2.7 million people who had ever taken out a HELP loan had died without fully repaying). But each year the Budget includes an expense for lending that year that is not expected to be repaid. In recent times, it has been around $1.5 billion a year.