Is HECS a tax?

My use of the word ‘lent’ in the chart below was disputed on Twitter, on the grounds that payments of HECS or HELP are tax levies. Although not spelled out in the Twitter comment, this point is often more than just a semantic one. It is part of a larger argument about how student/graduate-sourced funding of higher education should work.HELP total debt

One potential system for funding higher education is a graduate tax. The idea here is that graduates pay a proportion of their income above a threshold for a period of time after they complete their degree. With a graduate tax,  higher education is free but extra taxes are paid by financially successful graduates. The revenue could go into general government funds or be set to recover what the government thinks should be the student contribution to total higher education expenditure. But there are no specific charges for subjects or courses and there is no loan. The language of ‘lent’, ‘borrowed’ or ‘debt’ would not make sense conceptually or legally.

Veteran Labor (and current QUT) higher education policy adviser John Byron has argued for thinking about HECS in something like these terms:

HECS (by whatever name) is not a loan so much as a profit-sharing scheme: the commonwealth not a bank but a venture capitalist. The public finances education for its own collective benefit, both economic and social.

It is rational to recruit potential students as widely as possible; it is also expensive.

So those deriving conspicuous personal benefit are asked to tip some of those dividends back in, up to a limit based on their time (and, today, disciplinary location) within the system.

The appeal from a left-of-centre perspective is that a graduate tax makes it more explicit than the current system that higher education is free at the point of entry, and that it adds to the progressive nature of the tax system.  A graduate tax is capped in time but not money, so financially successful graduates can pay back many times more than what was spent on their education in the first place (covering the costs of those who repay little or nothing).

An implied graduate tax model is used as part of the pushback against proposals (sometimes from me) to reduce the initial HELP repayment threshold and end the write-off of HELP debt in deceased estates. The assumption behind these proposals is that HELP is debt that should be repaid, not a special charge on graduates with high earnings.

Whatever the conceptual attractiveness of a graduate tax to some people, I don’t think the language of tax accurately describes Australia’s higher education funding system as it stands.

Although the Australian Taxation Office is tasked with collecting HELP payments, legally and conceptually the underlying charges are more like a fee for service than a tax.

The distinction between a tax and a fee for service is written into the Constitution (section 53). The difference is usually described as being that a tax raises money for the general purposes of government while a fee for service is payment for the provision of goods and services.

HECS or HELP debt has always been incurred for a specific service. It’s charged by the unit of study (subject), and is not a general charge for being in the categories of ‘student’ or ‘graduate’.  Nobody is required to pay back more than what they borrowed plus indexation/loan fees. The language of ‘loan’ and ‘debt’ was in the legislation from the start. Repayments went into a special fund dedicated to higher education purposes, not general tax revenue.

Since 2005, the charge for each subject has been set by and paid to universities rather than the government (up to a regulated maximum by subject for students in Commonwealth-supported places, and a regulated total debt for fee-paying students). The government’s role is to lend money.

HELP is a very soft loan, with no repayments on low incomes and with a write-off on death. Policymakers should think more carefully about how repayments interact with the tax and social security systems. But the money is lent to students and it is a debt.


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