Reforming student loans to recover debt could save higher education budgets

by Andrew Norton

Published by The Australian Financial Review, Monday 7 April

Last April, the higher education sector was shocked by big teaching and research funding cuts. It is braced for more in next month’s federal budget. But what if higher education savings could be achieved at no cost to universities and without negative social consequences?

Reduced expenditure on the Higher Education Loan Program, HELP, could be the way. As more students borrow through HECS-HELP, FEE-HELP and other loan schemes, HELP subsidies become a growing share of higher education spending.

HELP’s biggest expense is debt not expected to be repaid, or doubtful debt. About 17 per cent of annual new lending is unlikely to ever be recovered, or around $1.1 billion in 2013-14, and $1.4 billion by 2016-17. This is counted as a budget expense each year, as an honest account of HELP’s true cost.

Total doubtful debt could reach $13 billion by 2016-17.

Some doubtful debt is an intended part of HELP. The government takes part of the financial risk of higher education, to encourage enrolments and as a social policy protection against hardship.

That is why there is an income threshold below which no HELP repayment is required, which is $51,309 for 2013-14. But HELP’s repayment system is more generous than needed to manage student risk.

The most obviously overgenerous aspect of HELP is that graduates living overseas don’t repay. There is no in-principle reason for this exemption. It is just a byproduct of using the Australian income tax system to collect compulsory repayments. England and New Zealand, which have similar student loan systems, both require student debtors living overseas to repay.

While Australia should also collect repayments from overseas HELP debtors, on its own this will not radically reduce doubtful debt.

While many recent graduates spend extended periods of time outside Australia, most return and repay. Of those who stay away, England and New Zealand’s experience suggests that non-compliance will be significant.

Reducing the initial income threshold for repayment would decrease doubtful debt, although not by much unless the cut was very large. But a significantly lower threshold would create, rather than manage, financial risk for students and graduates. It would be better to slow growth in the threshold by linking it to inflation instead of average weekly earnings. This would increase repayment in the long run, while maintaining the threshold’s real value.

The largest savings would come by ending one unusual feature of HELP. Unlike most other debts, HELP is written off for deceased estates. This avoids the politically unattractive prospect of the Australian Taxation Office collecting the small estates of students or graduates who die young. Fortunately they are not typical. More than 90 per cent of people die aged 60 years or more, and HELP debtors will be no different.

Some HELP debtors receive low incomes all their lives and never repay. But many HELP debtors who earn less than the threshold are in households with good finances. Three-quarters of partnered graduates aged between 35 and 50 with incomes below the HELP repayment threshold live with someone who has an income above the threshold.

For partnered female graduates earning less than the threshold, nearly 40 per cent live with someone earning $100,000 a year or more.

Shared family assets or inheritance mean that many HELP debtors who don’t repay will die with sizeable estates. In these cases, the HELP deceased estate write-off will often deliver a windfall gain to their adult children. They will benefit from an estate that is not obliged to repay all its debts.

We can target HELP’s social policy expenditure much more effectively than this. Requiring asset-contingent repayment of HELP would protect the genuinely poor, while restoring HELP’s finances. A $100,000 asset threshold would recover much of the debt that would otherwise not be repaid. Combined with the smaller reforms to overseas repayment and the threshold, recouping HELP debt from deceased estates could reduce doubtful debt from 17 per cent of new lending to 7 per cent.

By 2016-17 these changes could save more than $800 million a year. They would avoid the need for the expenditure cuts that universities now face.

For further reading download the report, Doubtful debt: the rising cost of student loans