For some time former Liberal adviser John Adams and Senator Chris Back have been promoting the idea of using superannuation to pay off HELP debt. Adams put his case on Catallaxy last year, and Senator Back is in the AFR again today on the subject. At The Conversation, Geoff Sharrock has a different take on the same idea, proposing that annual superannuation payments by employers be diverted into meeting that year’s HELP repayments.

You would have to be a bit desperate use superannuation, on which you can reasonably hope to earn a 5-10% a year rate of return on average, to pay off a debt with 2-3% interest. But the proposals are about cash flow, not long-term financial advantage. Any HELP debtor who earns the repayment threshold has to repay more than $2,000 a year, and someone on $100,000 a year will have to repay at least $8,000. While people on these incomes are not poor by general community standards, they could reasonably regard their current needs as more important than additional wealth or consumption in the future.

There is good evidence that people manipulate their income to stay below the HELP repayment threshold (see for example figure 22 on page 40 of our recent report), even though many of them probably will repay eventually. So there would probably be some demand for trading in super for repaying HELP. The Sharrock plan is likely to have more voter appeal than the Adams plan, which will only have the desired effect for debtors who have enough accumulated superannuation to clear their entire debt (as HELP repayments are only based on current income, not outstanding balance*). Most new bachelor-degree graduates will have too little in their super accounts to clear the $20,000 to $40,000 they will typically owe after completing an undergraduate degree, but as Sharrock shows the 9.5% of income annual compulsory superannuation investment is always higher than the compulsory HELP repayment.

But should the government allow superannuation to be used in this way? The two big issues are whether superannuation should be diverted from its core retirement savings purposes, and whether it will save the government money as well as being more convenient for debtors.

Adams is aware of the criticisms, particularly around the long-term impact on retirement income. He says people could be required to make up the contributions later. As with HELP repayment on family income, this would be complex to administer and enforce. It needs a counter-factual amount that would have been saved, and a plan for how it is going to be reached. Sharrock just observes that in his plan most graduates would still have decades of work ahead of them. In part, how big an issue this is will also depend on the level of HELP debt.

Perhaps the bigger danger to retirement savings is the precedent using superannuation for HELP would set. While people who have not been to university don’t have HELP repayments, they do on average have lower incomes, so it is hard to say that HELP debtors have any unique cash flow issues (apart, perhaps, from those created by lifestyle expectations). Adams provides an intellectual differentiation between using HELP for other purposes, such as buying a house, and using it to repay HELP. But inevitably the details would be lost as other people tried to free their superannuation savings for more urgent uses.

The other big question is the effect on the government’s finances. There is value to the government in earlier repayment of HELP debt through lower interest subsidies, and possibly in reduced doubtful debt (although people who think they might not repay in full will be less likely to use their super for early repayment). But the government will lose the taxation it would receive on superannuation fund earnings. Super for HELP also seems open to rorting, by salary sacrificing into superannuation and then using the money to repay HELP debt. It would be a back door way of restoring the bonus for repaying ‘early’ that will otherwise be abolished next year. Many years in the future, there may also be additional issues with people whose super savings are too low for retirement who end up having to rely on government payments.

While I do want HELP debt to be repaid more quickly, on balance I don’t think diverting money from superannuation is the way to do it.
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*Unless HELP repayment is completed during the year.

A headline in The Australian this morning reads “Student loan: Poll backs current repayment threshold”.

In a American-style voting system where the largest single minority wins, I guess that’s right. The current threshold is $54,126, and 27% of respondents chose the nearest $10,000 increment of $50,000 (slide below).

But another way of looking at it is that half of all the sample, and about two-thirds of those who offered a view, came up with a number below the current $54,126. The 2014 Budget proposed reducing the threshold to $50,638. Nearly a quarter of respondents offered a number below the $42,000 we recommended in our report last week.

According to The Australian‘s article respondents were not told the current threshold. If they had been, I expect that there would have been stronger status quo bias. Still, for an issue that has not been prominent until recently I think these poll results are reasonably good, from a reformist perspective.

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The poll was conducted by MetaPoll. No precise details on the methodology were published, although younger people were less in favour of a lower threshold than older people.

The Australian‘s higher education gossip column yesterday reported some (anonymous) objections to our plans to change HELP’s repayment system.

Some of these are based on the belief that HELP debtors are in a special category who should be treated much more generously than their contemporaries who did not do quite so well at school. For reasons outlined earlier in the week, I do not think this is a convincing point of view.

But there are some more interesting points about repayment times:

A reader contacted us to say it would “perpetrate some asymmetries in the system”. How? “Not all graduate jobs begin with the same salary and not all jobs have the same prospects for wage increases over the working life of a graduate. These two parameters (starting salary and wage trajectory) have a dramatic effect on repayments.” Indeed and both would much more dramatically impact women than men, no doubt.Our reader astutely pointed us to the UK’s loan repayment calculator which from which we can see an investment banker might pay of their debt in 12 years 5 months while someone in sales would take 18 years 11 months to pay off the same debt. Graduates on really low wages (teachers, child care workers, social workers) would take more than 30 years and still have 45 of their debt overhanging because of the power of interest. With a 30 year debt forgiveness model, doubtful debt in the UK looks set to skyrocket…. Our reader says it would be helpful if the Grattan Institute or some other interested body produced a similar modelling tool so we could look at the long-term effects of such proposals.

A loan repayment calculator website that helps students understand their repayment obligations is an excellent idea. However, the analogy with England doesn’t work for either the current HELP system or what we propose in our report. There are some important differences:

Underlying borrowing. In England, most undergraduate courses are a flat £9,000 a year. Given different occupational earnings, that inevitably produces very wide variation in projected repayment periods. In Australia, student contributions are roughly linked to likely future earnings. Admittedly, the amounts are based on a back-of-the-envelope calculation made 20 years ago, and need an update. But work we’ve done before suggests that it tends to cluster by-discipline repayment times much more around the median than would a system based on flat fees, costs, or a fixed proportion of costs.

Interest rates. In England, there is a 3% real interest rate, here it is zero except for the minority of students charged loan fees. But Australia’s system means that compounding interest is a minor issue for debtors compared to England. There, slow repayment can substantially increases the real value of the debt; here it won’t.

Repayment system. In England, debtors repay 9% of their income above the threshold. Here, at each threshold you repay a percentage of all your income that increases depending on how much you earn, from 4% to 8% now. Because their threshold is lower than Australia’s (coincidentally, about the $42,000 we suggest for here) more lower-income debtors make some repayment. But except for English debtors earning below the Australian threshold, this leads to lower annual repayment than here, as seen in the slide below from our report:

Point of write off. The English write off debts after 30 years if the debtor is still alive. Here it is only on death. Australia will get more repayment from women returning to full-time paid work after they finish their main childcare period.

So high original debts, slow repayments, and real interest on the debt all join to produce long repayment times in England, with the consequent higher risk of doubtful debt exacerbated by premature write-off of debt.

Under the new thresholds we propose in our report (including lower upper thresholds), Australian repayment times would be reduced. That would be the only effect for the vast majority of higher education HELP debtors, who will eventually repay even under the current system. Their total costs stay the same in real terms, and slightly decrease in nominal terms as they will incur less indexation of their debt.

A proportion of additional repayment will be from people who might not otherwise repay. As the report and associated coverage note, most of the personal debt holders in these cases will be female, but the actual effects are likely to be much more gender neutral. In our analysis, it is long-term part-time work by second-income earners that comes out as a major doubtful debt risk, and having some of those debtors repay 3% of their income in HELP repayment will reduce this. However, the repayment will be much less than 3% of household income, and the effects will in practice be shared by usually male partners and children. Using HILDA for analysis, the singles affected are 58% female, which is almost exactly their share of the student population.