The recent debate about student debt in England was triggered by this very interesting paper from the Institute for Fiscal Studies. I have used some of their analysis to think about how their situation differs from Australia’s, despite both having income contingent loans.
1) Total tuition costs. As I noted in my post last week, tuition charges are higher in England than in Australia, with most courses a flat £9,000 per year, or about $15,000 on current exchange rates. Australian annual student contributions this year range from $6,349 (arts, education, nursing) to $10,596 (law, medicine, commerce). The British pound has a low exchange rate at the moment; if we use $US purchasing power parity English courses are between 1.7 and 2.9 times more expensive than in Australia.
The high English tuition fees are partly because there are no tuition subsidies offsetting them in many courses, while all undergraduates at public universities in Australia receive tuition subsidies. But it is also because of their flat fee system, which means that students in low-cost fields are charged more than the total cost of their course.
While undergraduate courses are cheaper in Australia than England whichever way we compare them, in Australia we don’t have a good understanding of how HECS-HELP debt for undergraduate courses is interacting with FEE-HELP debt for postgraduate courses. But further study in full-fee courses is likely to be one reason why we are seeing strong growth in total HELP debts above $50,000.
2) Living costs while studying. In Australia, we converted the twice yearly lump-sum student start-up scholarship to a loan of $2,070 a year, but otherwise students are still eligible for grants via Youth Allowance, Austudy and Abstudy. In England, government student income support for new students is based on loans. As with student income support here, a means tests determines eligibility for the loan. The maximum amount that can be borrowed varies on location and household circumstances, between £6,904 and £10,702, or at current exchange rates about $11,500 to $17,900. So living costs borrowing in England could generate more debt than an undergraduate course in Australia.
3) Graduate earnings. The UK median income for graduates aged 21-30 is well below the equivalent Australian figures. In US dollar purchasing power parity terms, Australian bachelor degree graduates at a median income earn about $10,000 more than their English equivalents in early career. Perhaps quirks in the data mean that the UK 21-30 sample is skewed young, but other data sources also suggest that UK graduate financial outcomes are poor.
Although Australian graduates earn more in absolute terms, their graduate premium appears to be lower. They earn about 20 per cent more than a non-graduate, while an English graduate earns 30 per cent more than a non-graduate. Possibly there are issues with the very broad ‘non-graduate’ category, which includes everyone from upper-level vocational qualification holders to people who did not finish school. But even allowing for that, Australia’s high minimum wage compared to other countries narrows the income range.
4) Annual loan repayments. Typically, Australian graduates repay much more of their student debt each year than their English counterparts. This is partly because they earn more, and therefore with income contingent loans repay a greater amount. It is also because Australian graduates repay a percentage of their entire income, while English graduates repay 9 per cent of their income above the £21,000 threshold. So in 2016 a graduate on median English earnings (for the 21-30 age group in the chart) would have repaid only £360, while on Australian median graduate earnings the repayment would have been $3,380.
5) Interest rates. In Australia there is no real interest charged on student debt, in England it is 3 per cent with some exceptions. The interaction of real interest and very slow repayment means that interest bills can be very high over the potentially multi-decade life of the loan, amounting to tens of thousands of pounds and years of extra repayments.
6) Life of the loan. In England, outstanding debt is written off after 30 years. In Australia, it is not written off until death.
If the IFS report is right, the English student finance system isn’t working for anyone. Students and graduates will have huge amounts of debt hanging over them, even if on an annual basis it is not much of a cash flow cost. From the government perspective, huge amounts of debt will be written off – 77 per cent of individuals will not fully repay within the 30 years. In Australia we have typically calculated write-offs as a proportion of debt rather than debtors, but doubtful debt is likely to be around 20 per of annual lending, implying that the vast majority of debtors will repay. The IFS model is sensitive to earnings, and so graduate earnings might improve in future, and with them the loan scheme’s finances. But it is hard to avoid the conclusion that in England things need to change.