Many graduates will repay less per year, and maybe less in total, under the new HELP thresholds

The Government had a rare higher education Senate victory this week, passing various amendments to the HELP loan scheme.

These include a series of changes to HELP repayment thresholds. Most of the political attention went to the initial repayment threshold, below which no repayment is required. It will drop from the current $52,000 to just under $46,000 in 2019-20. At that point, debtors will have to repay 1 per cent of their entire income.

In principle, I support this step in the direction of better aligning HELP with other government income support thresholds. This 2016 Grattan report supported a lower initial threshold.

Unfortunately, another key recommendation of that report, of consistent percentage increases between each threshold at which the repayment rate increases, was not strictly followed.

For most of the higher thresholds, each is 6 per cent higher than the one before it. But there is a 15 per cent gap between the first and second thresholds.

Combined with starting the repayment percentage at just 1 per cent,  this radically changes the nature of the threshold reform. It is not now something that we can assume will significantly alter HELP doubtful debt.

One intention of the original Grattan proposal was to move debtors more quickly through the repayment rates.  This was partly to recover more HELP debt before female full-time labour force participation drops from their late 20s, as shown in chart 1 below.

Chart 1: Female bachelor degree graduate labour force status, 2016

female labour

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Should HELP debts be capped?

The Council of Australian Postgraduate Associations has a paper out today opposing the government’s legislation that would cap HELP debt at $104,000 for most students, or $150,000 for students taking the high-end health courses. A media summary is here.

There is already a similar cap for students borrowing under the full-fee student HELP program, FEE-HELP.  The legislation would count HECS-HELP borrowing towards the total – this is the loan scheme used by the vast majority of domestic undergraduates paying student contributions for Commonwealth supported places.

Contrary to the impression given by the media article, adding in HECS-HELP would be prospective, only applying to debt accrued after 1 January 2020.

CAPA is right that a cap will tip more students into an at least partial up-front fee market. But given HELP’s overall design, this is not a knock-down argument against it.

As I have long argued, HELP has substantial costs in doubtful debt. And although the big debtors tend to be in fields with relatively good earnings prospects, the more someone owes the greater the risks for taxpayers – both because of the total amount owed, and because of the danger that the debtor will not spend long enough earning an income above the repayment threshold to repay in full.

Especially when it is hard to control costs by reducing repayment thresholds or abolishing the deceased estate HELP write-off, that creates pressure to reduce high-risk debt by limiting what students can borrow. The government can’t lose what it doesn’t lend. We are already seeing this in other parts of the system.

Loan caps can also usefully serve as soft fee caps in the fee-deregulated parts of the system. CAPA notes that even the current FEE-HELP cap isn’t enough for some JD courses. But if some universities are charging exorbitant fees for law courses that isn’t something public policy should encourage, especially when the fees end up being subsidised through HELP debt write-offs. There are plenty of much cheaper law courses out there.

There is room for debate about exactly what the cap should be. But $104,000 would allow most students to do an undergraduate degree and professional development postgraduate courses. In an amendment proposed by the government, debtors could replenish their cap by paying off some of their existing debt.

If we completely re-worked HELP, we could take a more actuarial approach to lending at higher levels – allowing it for low-risk borrowers, declining for high-risk borrowers. But that would be a radical conceptual change to HELP, with discipline, age, and gender all likely to significantly influence actuarial risk.

Staying within HELP’s current conceptual basis, we need general rules that support reasonable amounts of study but protect taxpayers from courses with excessive fees and from perpetual students. A cap on outstanding HELP loans is one such rule.

 

 

 

 

Has abolishing the discount for upfront payment of student contributions made a difference to upfront payment rates?

An article in The Conversation on incentives around student contribution payments made me wonder what difference the 2017 abolition of the 10 per cent discount for paying upfront was having.

The discount had a cost to taxpayers, since universities were compensated by the Department for upfront payment discounts. If students pay upfront, the risk of the remaining debt not being repaid is removed, as is the interest subsidy for the time that repaid debt is outstanding. The discount is only worthwhile from a taxpayer perspective if it induces upfront payments on a sufficient scale to reduce doubtful debt and interest subsidies by more than the cost of the compensation to universities.

At the time, I supported the decision to abolish the discount, because I doubted that it was generating a net financial benefit for taxpayers.

One reason for this is that various sources of evidence over the years suggested that upfront payments were coming from sources unlikely to be very sensitive to discounts. These include parents wanting their kids to be free of debt, employers, and scholarships. In the 2012 student finances survey, for example, 9 per cent of undergraduates reported receiving money to pay tuition fees. Read More »

A high HELP repayment threshold increases pressure to restrict or deny access to HELP

The Department of Education and Training’s 2016-17 annual report announced the first public use of a project to link up the ATO’s HELP repayment data with the Department’s enrolment data:

In 2016–17 the department worked with both the Australian Taxation Office and the Australian Government Actuary to create a database that links education courses with
income and occupation information. In 2018, the QILT website will publish graduate income data sourced from this database, which will inform students of the earning potential in their study area.

This will, of course, be very interesting, and could include income by university attended, as well as by study area. This has been done in the UK, although their QILT equivalent does not use it at this point.

But this data linking work is being done to better understand HELP debt and which factors affect repayment. It has potential uses well beyond student advice, uses that would fit a pattern of the government trying to reduce its risk of bad HELP debt.

The most obvious of these is to restrict access to courses with high rates of non-repayment. This was a feature of the VET Student Loans reform so that

loans are only being provided for courses that are closely aligned to the skills employers need in their workplace, thereby enhancing the opportunities for graduates to work, and to repay the money lent to them by taxpayers. [emphasis added]

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Some students could lose FEE-HELP by accident or no fault of their own

In supporting the government’s Education Legislation Amendment (Provider Integrity and Other Measures) Bill 2017 in the House of Representatives yesterday, shadow universities assistant minister Terri Butler said ‘Labor supports greater protection for students, particularly those accessing the FEE-HELP system’.

The provider integrity bill would put some extra constraints on the marketing activities of non-university higher education providers (NUHEPs), whose domestic students typically use FEE-HELP (because they are denied access to the Commonwealth supported places that would let them use HECS-HELP).

But the provider integrity bill also exposes NUHEP students to new risks, and greater risks than students in the university system.

If a student in a public university fails most of their first year subjects, they will probably be sent to their institution’s unsatisfactory progress committee. But whether they continue with their studies will be an academic decision that can take a holistic view of the student’s circumstances.

Under the provider integrity bill, a NUHEP student using FEE-HELP – there were 46,000 of them in 2015, although students enrolled before 1 January 2018 will be grandfathered – will lose FEE-HELP eligibility if they fail too many subjects, and have to pay upfront fees unless they can demonstrate that there were special circumstances that were beyond their control, did not have their full impact until after the census date at which they incurred their HELP debt, and made it impractical to complete the unit. Read More »

England and Australia: two higher education income contingent loan systems with very different consequences

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. Read More »

HELP is not a profit-sharing scheme

In today’s Oz, John Bryon argues against lowering the HELP repayment threshold by arguing that HELP is a profit-sharing scheme:

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.

It is unjustified to lower the repayment threshold below the average wage.

Now there are versions of income contingent payment scheme ideas which can be seen as profit-sharing. Milton Friedman’s original idea was along these lines, in which people pay a percentage of their income for a fixed period of time. Some people would pay nothing for their education, while financially successful graduates could pay many times their original fees or costs of their course. In theory, this could permit a high threshold, if the lender was confident that total repayments would at least cover costs.

But HELP isn’t a profit-sharing scheme. It is a partial cost recovery scheme, in which the most the Commonwealth can ever receive is the amount that it lent plus indexation (or loan fee, for some FEE-HELP students). Recovering costs in a labour market where many people work part-time means that the initial threshold cannot be high, and indeed it is relatively low in other jurisdictions that have income-based repayments such as New Zealand, England, and some US loan schemes.

The partial link with average weekly earnings in Australia was about the late 1980s politics of ending free higher education and probably a view that it wasn’t going to be hugely costly, given that at the time average wages was much less driven than now by people who didn’t have degrees (in 1989 10 per cent of workers had degrees, now it is 30 per cent). It was never a mechanism for profit sharing.