Is HELP doubtful debt likely to increase?

In February last year, when introducing legislation to change HELP repayment thresholds and rates, along with other HELP reforms, the government said that:

The fiscal challenge for the government is that HELP repayments have not kept pace with HELP lending growth. From 2010-11 to 2016-17, the level of new debt not expected to be repaid increased from 16 per cent to 25 per cent.

But unfortunately there is a disconnect between the stated purpose of the legislation and its likely effects. The thresholds and rate changes are unlikely to reduce doubtful debt , and indeed may increase it. Using  ATO tax data,  at the Grattan blog Will Mackey estimates that the new HELP repayment thresholds will produce slightly lower total annual student debt repayment than the previous thresholds.

The reason is that although some low and high income earners will repay more each year, most of the more numerous middle-income earners will repay less, producing a total repayment estimate of about $50 million a year less than if the previous thresholds and rates had been retained.

I believe that this loss is due to an error in transitioning from the original Birmingham 2017 reform bill to the 2018 version. The new bill created a higher initial repayment threshold of $46,000 instead of $42,000, which was a deliberate political fix with accepted financial costs.

But the new bill also increased the income thresholds at which higher rates of repayment start, which I think was a mistake. It happened because the bill set a high second threshold and then, as it had in the original bill, increased repayment rates at six per cent income increments.* In the first bill, the six per cent income increments would have increased repayments across the income range. But with a higher base threshold from which the increments were calculated, a six per cent increment in the second bill no longer had this effect. Only new repayment rates above 8 per cent of income for high income earners brought in extra revenue.

For doubtful debt, the key issue is what effects the new threshold and rates have on long-term repayment prospects. I doubt the new upper threshold and rates will have any significant effect. People earning $100,000 plus a year are likely to have already repaid much of their debt, and were repaying $8,000 or more a year anyway under the old thresholds. With the new system they will finish repaying a little sooner, but they were always low risk for doubtful debt.

The new 1 per cent repayment rate on incomes between $46,000 and $52,000 will bring about 130,000 additional debtors into repayment. But their individual annual repayments will be low. Depending on their total debt, each year’s repayment may not even cover their annual CPI indexation. Someone whose income was persistently in this income range may never reduce their nominal debt, which will eventually be written off when they die.

On Grattan’s analysis, a key factor in reducing doubtful debt is increasing repayment from female graduates before they leave full-time work. As the chart below shows, full-time work rates peak in their late twenties.  HELP debt not repaid by then may never be recovered or repaid only over along time period (full-time work increases again in their forties, but never goes back anywhere near its previous peak).

PT

I believe that the main practical effect of the new thresholds and rates will be lower repayments during the first decade of graduate careers, when normally incomes increase quite rapidly. The losses from this will be only partly offset by more repayment from part-time workers, and therefore long-term doubtful debt will probably increase. On an annual basis, if extra repayments from high income earners are deducted the new thresholds and rates are estimated to generate $120 million less revenue for the government.

Because so few people understood the significance of the upper thresholds outside the government as well as within it, these could have been altered with little additional political cost. But as it turned out the government spent a lot of political capital for no financial gain.

———

*The 2017 bill would have created a new initial threshold for repayment of $42,000, compared to the $52,000 it would have been otherwise. The repayment rate at $42,000 was 1 per cent of income. From there, the repayment rate would increase in 0.5 per cent increments with each 6 per cent increase in income (so someone on $44,250 would pay 1.5 per cent, $47,191 2 per cent, and so on up to 10 per cent).

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